100 Introduction - Reutersstatic.store.tax.thomsonreuters.com/static/samplePages/Sample...Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Government

Checkpoint Contents

Accounting, Audit & Corporate Finance Library

Editorial Materials

Government

Preparing Governmental Financial Statements

Chapter 1 Introduction

100 Introduction

100 Introduction

Scope of the State and Local Governmental Sector

100.1 In 2007, the U.S. Bureau of the Census identified more than 89,000 units of local government, in

addition to the 50 states, classified as follows:

a. Counties 3,033

b. Municipalities 19,492

c. Townships 16,519

d. School districts 13,051

e. Special districts 37,381

89,476

Municipalities, counties and townships include cities, towns, villages, parishes, boroughs, etc. Special districts

include port authorities, industrial development and housing agencies, water, park, and planning commissions,

etc. In addition, there are thousands of subordinate agencies of these governments, that is, statutory

authorities, commissions, corporations, etc., with governmental characteristics that are subject to

administrative or fiscal control of independent local governments. Section 101 discusses the definition of

governments in more detail.

100.2 States, counties, cities, towns, etc., provide a broad range of services to citizens, whereas special

districts usually provide narrower, specialized services. In addition, governments may operate organizations

such as hospitals, colleges, universities, employee benefit plans, or other nonbusiness organizations to provide

services.

Page 1 of 60Checkpoint | Document

5/8/2013https://checkpoint.riag.com/app/view/toolItem?usid=bc03cnb59d0&feature=ttoc&lastCpRe...

100.3 By any measure, state and local governments play a significant role in the U.S. economy. In 2010, for

instance, state and local governments raised nearly $3.2 trillion in revenue, almost 68% of it in the form of

property, sales, or income taxes. They spent more than $3.1 trillion, 27.6% of it for education. Debt at the end

of 2008 totaled $1.1 trillion for states and $1.7 trillion for local governments. In May 2011, state and local

governments employed 19 million people.

100.4 The American Recovery and Reinvestment Act of 2009 (Recovery Act) is having a significant impact on

spending by state and local governments. As of June 30, 2010, the Recovery Act had provided more than

$200 billion to state and local governments—primarily for infrastructure, healthcare, education, and general

fiscal stabilization. The federal government has estimated that allocation of Recovery Act funds to individual

states range from 4.8% to 25.2% of a state's budget. Other elements of the Recovery Act indirectly benefit

state and local governments; for example, bond subsidies and aid to individuals. Recovery Act funding (and

spending by state and local governments) can be tracked at www.recovery.gov.

100.5 Besides their economic significance, local governments affect all individuals and organizations in the

United States. They regulate aspects of daily and commercial life through laws, ordinances, regulations, etc.

They provide services such as education, police and fire protection, court systems, transportation, water supply

and other utilities, streets and highways, parks, libraries, etc.

100.6 The role of state and local governments, relative to that of the federal government, has expanded in the

last few decades due, in part, to reduced federal spending at the state and local level along with growth of

federally mandated programs imposed upon states and localities. In addition, there has been an increased

demand by citizens for public services. One result has been an increase in the number of special districts

created to provide specialized services—over 43 percent since 1977.

100.7 Financing methods have also changed, due, in part, to taxpayer resistance to new taxes and initiatives

to limit tax increases, as well as to governments reaching their debt capacity limits. As a result, traditional

financing sources such as property taxes have decreased while sales taxes and user fees have increased.

Scope of This Guide

100.8 This Guide is concerned with the measurement, presentation, and disclosure of transactions and

balances in accordance with GAAP in governmental financial statements. Thus, it focuses on the accounting

and financial reporting standards for governmental entities as promulgated by the Governmental Accounting

Standards Board (GASB). It is not a bookkeeping manual, that is, it is not concerned with preparation of books

of original entry. However, it does provide journal entries to illustrate discussion of the accounting for various

transactions, particularly complex ones or those that affect more than one fund.

100.9 GASB Pronouncements Considered

This Guide includes relevant technical developments as of October 2012. It is current as of:

a. GASB Statement No. 68, Accounting and Financial Reporting for Pensions—an amendment of GASB

Statement No. 27.



b. GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in

Governmental Fund Financial Statements.

c. GASB Technical Bulletin No. 2008-1, Determining the Annual Required Contribution Adjustment for

Postemployment Benefits.

d. GASB Concepts Statement No. 5, Service Efforts and Accomplishments Reporting—an amendment of

GASB Concepts Statement No. 2.

100.10 This Guide provides an overview of GASBS No. 67, Financial Reporting for Pension Plans—an

amendment of GASB Statement No. 25, and GASBS No. 68, Accounting and Financial Reporting for

Pensions—an amendment of GASB Statement No. 27. GASBS No. 67 replaces the requirements of GASBS

Nos. 25 and 50 for pension plans administered through trusts or equivalent arrangements that meet certain

criteria effective for financial statements for fiscal years beginning after June 15, 2013, with earlier application

encouraged. GASBS No. 68 replaces the requirements of GASBS Nos. 27 and 50 for pension plans

administered through trusts or equivalent arrangements that meet certain criteria effective for financial

statements for fiscal years beginning after June 15, 2014, with earlier application encouraged. Because of their

delayed effective dates, GASBS Nos. 67 and 68 have not been incorporated into the overall discussion in this

Guide but are discussed separately in sections 808 and 809. However, the disclosure checklist at Appendix B-

1 has been updated to include disclosures for GASBS Nos. 67 and 68, as well as GASBS Nos. 25 and 27.

100.11 Nonspecialized Accounting Standards for Business-type Activities

As discussed in section 107, GASBS No. 62, Codification of Accounting and Financial Reporting Guidance

Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, eliminates the option for business-

type activities to follow new FASB pronouncements, although they may continue to be applied as “other

accounting literature.” GASBS No. 62 is effective for financial statements for periods beginning after December

15, 2011, with earlier application encouraged. Therefore, references to specific paragraphs of GASBS No. 62

replace previous references to FASB and AICPA pronouncements where appropriate in this Guide.

100.12 Specialized Accounting Standards Not Covered

This Guide does not cover the specialized accounting standards in the following documents and

pronouncements:

a. AICPA Audit and Accounting Guide, Health Care Organizations. Section 1708 discusses the

requirement for governmental healthcare entities that use enterprise fund accounting and financial

reporting to follow the AICPA Health Care Guide. Although this Guide does not discuss the provisions of



the AICPA Health Care Guide in any detail, it will be helpful to preparers of governmental healthcare entity

financial statements to the extent that GASB requirements apply.

b. Broadcasters, discussed in GASBS No. 62, paragraphs 385-388 (GASB Cod. Sec. Br10).

c. Cable television systems, discussed in GASBS No. 62, paragraphs 389-399 (GASB Cod. Sec. Ca5).

d. Foreign currency transactions, discussed in GASBS No. 62, paragraphs 165-172 (GASB Cod. Sec.

F70).

e. Insurance entities other than public entity risk pools, discussed in GASBS No. 62, paragraphs 400-430,

as amended by GASBS No. 65, Items Previously Reported as Assets and Liabilities, para. 20 (GASB Cod.

Sec. In3).

f. Lending activities, discussed in GASBS No. 62, paragraphs 431-451, as amended by GASBS No. 65,

paragraphs 21-24 and 31, effective for fiscal years beginning after December 15, 2012 (GASB Cod. Sec.

L30).

g. Mortgage banking activities, discussed in GASBS No. 62, paragraphs 452-475, as amended by GASBS

No. 65, paragraphs 26-27, effective for fiscal years beginning after December 15, 2012 (GASB Cod. Sec.

L30).

h. Regulated operations, discussed in GASBS No. 62, paragraphs 476-500, as amended by GASBS No.

65, paragraph 29, effective for fiscal years beginning after December 15, 2012 (GASB Cod. Sec. Re10).

i. Research and development arrangements, discussed in GASBS No. 62, paragraphs 374-384 (GASB

Cod. Sec. R50).

j. Sales of real estate, discussed in GASBS No. 62, paragraphs 282-349 (GASB Cod. Sec. R30).



k. Costs and initial rental operations of real estate projects, discussed in GASBS No. 62, paragraphs 350-

373 (GASB Cod. Sec. R30).

GASBS No. 35, Basic Financial Statements—and Management's Discussion and Analysis—for Public

Colleges and Universities, requires public colleges and universities to follow the special-purpose government

provisions of GASBS No. 34. Chapter 17 of this Guide discusses accounting and reporting by special purpose

governments, including colleges and universities.

100.13 Governmental Not-for-profits

Entities that are established as 501(c) organizations under the U.S. Internal Revenue Code but that meet the

definition of a government (section 101) are required to report using the GASB standards as discussed in this

Guide. SLG, paragraph 1.02, states that incorporation as a 501(c) not-for-profit organization is not a criterion in

determining whether an entity is governmental or nongovernmental for accounting, financial reporting, and

auditing purposes. Rather, an entity is assumed to be governmental or not based on the definition discussed in

paragraph 101.5 of this Guide. Some governmental not-for-profits may be reported using enterprise fund

accounting and financial reporting based on GASBS No. 34, paragraph 147, even if they do not meet the

definition of an enterprise fund. See the discussion beginning in paragraph 1701.24 of this Guide.

100.14 States and Special-purpose Governments

The focus of this Guide is on governmental accounting principles as they apply to general purpose

governments—cities, other municipalities, and counties. However, the guidance is also generally applicable to

states as well as school districts and many other special-purpose governments. Sections 1702 and 1703

discuss accounting issues unique, or particularly significant, to states and school districts. Chapter 17 of this

Guide also discusses the accounting and financial reporting principles for public employee retirement systems

(PERS) (section 1705), external investment pools (section 1706), and public entity risk pools (section 1704).

Accounting and reporting guidance for federal entities is beyond the scope of this Guide.

100.15 Performance and Reporting Standards Not Covered

This Guide covers financial statement preparation standards, that is, GAAP applicable to financial statements

of governmental entities. Its guidance is useful to preparers of GAAP financial statements, whether those

preparers are accountants in government or in public practice. Performance standards are the standards and

procedures that a CPA in public practice must follow when associated with, and reporting on, the financial

statements of a client. Performance and reporting standards include standards for the compilation, review, or

audit of financial statements. Discussion of performance and reporting standards is beyond the scope of this

Guide. Guidance on the performance and reporting for compilation and review engagements may be found in

PPC's Guide to Compilation and Review Engagements and guidance on performance and reporting for audits

of governmental financial statements may be found in PPC's Guide to Audits of Local Governments. In



addition, guidance on performing Single Audits for entities receiving federal awards is provided in PPC's Guide

to Single Audits.

100.16 Quality Control Standards Not Covered

Quality control standards relate to the internal system that a CPA firm uses to provide itself with reasonable

assurance of conforming to the professional standards (including performance and reporting standards) in

financial statement engagements. Quality control standards apply to compilation, review, attestation, and audit

engagements. Discussion of quality control standards is beyond the scope of this Guide. Guidance may be

found in PPC's Guide to Quality Control.

100.17 Ethics Standards Not Covered

Ethics standards relate to the performance of professional responsibilities by all members of the AICPA,

whether they are in public practice, government, industry, or education. Those standards are codified in the

AICPA Code of Professional Conduct. Discussion of ethics standards is beyond the scope of this Guide.

Organization of This Guide

100.18 Chapters

This Guide includes 17 chapters that discuss authoritative accounting literature pertinent to the chapter topic.

Each chapter presents examples and journal entries when appropriate to help in the understanding and

application of the accounting rule being discussed. Chapter 2 gives an overview of the basic fund accounting

principles, for example, use of the modified accrual basis of accounting by governmental funds and brief

descriptions of fund definitions, etc. Chapter 3 provides detailed descriptions of fund definitions and interfund

activity. Chapters 4-9 discuss basic accounting requirements and are arranged by financial statement category,

for example, revenues and receivables, cash and investments, debt, etc. Chapters 10 through 16 discuss

financial reporting requirements, including the financial reporting entity, basic financial statements, notes,

required supplementary information (RSI) and comprehensive annual financial reports (CAFRs). The following

chapters make up this Guide:

Chapter 2—Fund Accounting Overview.

Chapter 3—Fund Definitions and Interfund Activity.

Chapter 4—Revenues and Receivables.

Chapter 5—Operating Expenditures/Expenses and Liabilities (Other Than Employee Benefits).

Chapter 6—Cash and Investments.

Chapter 7—Capital Assets, Including Intangibles and Infrastructure.

Chapter 8—Employee Benefits.

Chapter 9—Debt and Debt Service.

Chapter 10—Financial Reporting Overview.



Chapter 11—Presenting Fund Financial Statements.

Chapter 12—Deriving Government-wide Financial Statements from Fund Financial Statements.

Chapter 13—Notes to Basic Financial Statements.

Chapter 14—Budgetary Reporting.

Chapter 15—Management's Discussion and Analysis.

Chapter 16—Comprehensive Annual Financial Reports.

Chapter 17—States and Special-purpose Governments.

Each chapter includes a section discussing future accounting developments, for example, GASB projects in

progress or exposure drafts outstanding. The Guide is updated annually for accounting and financial reporting

changes that result from the issuance of new GASB Statements or other pronouncements.

100.19 Appendixes

Chapter appendixes follow many of the chapters listed at paragraph 100.18. Appendixes to selected chapters

present checklists, worksheets, practice aids, cases, illustrative financial statements, and other information to

aid in understanding or implementing the standards discussed in the Guide. The appendixes are referred to by

a number letter combination where the number represents the chapter number and the letter represents the

order of the appendix. For example, Appendix 1A is the first appendix following this chapter. Other more

general appendixes are located at the end of the Guide. Those appendixes include the following:

• Appendix A—Comprehensive Annual Financial Reports.

• Appendix B-1—Governmental Disclosure Checklist.

Appendixes provided in this chapter include:

• Governmental entity determination checklist (Appendix 1A).

• Applying pre-November 30, 1989 FASB and AICPA Pronouncements Codified by GASBS No. 62

(Appendix 1B).

100.20 Acronyms for Authoritative Pronouncements

This Guide uses the following acronyms to refer to authoritative pronouncements:



a. GASBS No. X—Governmental Accounting Standards Board Statement No. X.

b. GASBC No. X—Governmental Accounting Standards Board Concepts Statement No. X.

c. GASBI No. X—Governmental Accounting Standards Board Interpretation No. X.

d. GASBTB No. XX-X—Governmental Accounting Standards Board Technical Bulletin No. XX-X.

e. GASB Cod. sec. xxxx.xxx—GASB Codification section xxxx.xxx (all references are to the June 30, 2012

-2013 edition).

f. BFC—The Basis for Conclusions section of a referenced GASB Standard.

g. GASB Comprehensive Implementation Guide—2012-2013—this GASB publication contains all

previously issued GASB Implementation Guides and updates them for the effects of new GASB

pronouncements. (See paragraph 107.10.)

h. SLG—The AICPA Audit and Accounting Guide, State and Local Governments (updated as of March

2012).

i. NCGAS X—National Council on Governmental Accounting Statement No. X.

j. SAS No. X—Statement on Auditing Standards No. X.

k. FASBS No. X—FASB Statement of Financial Accounting Standards No. X. 1



l. 2012 GAAFR—The GFOA Governmental Accounting, Auditing, and Financial Reporting, issued in 2012

(also called The Blue Book).

1Effective September 15, 2009, FASBS No. 168 replaced the previous four part hierarchy of GAAP for

nongovernmental entities with the FASB Accounting Standards Codification or “FASB ASC.” The FASB ASC

took all sources of nongovernmental GAAP under the previous hierarchy and merged them into a codification,

similar to the GASB Codification. The FASB ASC does not apply to governmental entities. As discussed in

section 107, the GASB issued Statement No. 62 in December 2010, to codify guidance contained in pre-

November 30, 1989 FASB and AICPA pronouncements that is applicable to state and local governments.

GASBS No. 62 is effective for periods beginning after December 15, 2011, with earlier application encouraged.

It is discussed throughout this Guide where relevant.

© 2012 Thomson Reuters/PPC. All rights reserved.

END OF DOCUMENT -

© 2013 Thomson Reuters/RIA. All rights reserved.



Checkpoint Contents


Editorial Materials

Government



101 Definition of a Governmental Entity

101 Definition of a Governmental Entity

Definition of a Government—THE BASICS

• Any entity that meets the definition of a government must follow GASB pronouncements (other than the

federal government). All others follow the FASB Accounting Standards Codification.

• All general purpose governments meet the definition of a government simply based on the fact that they are

public corporations or bodies corporate and politic.

• Other organizations may be governments based on one of the four characteristics discussed in paragraph

101.5.

101.1 What is a governmental entity? In some cases, the answer is obvious. A state or a city, for instance,

obviously is a government. In other cases, however, it may not be obvious whether a particular entity should be

considered governmental for the purpose of determining whether governmental accounting and reporting

standards apply. The determination may be particularly difficult for special districts or entities created under

general corporation or not-for-profit corporation laws and that perform some governmental functions, have

some characteristics of government, or are controlled by a governmental entity. For example, is a community

services center that provides youth recreation and job training services and is financed through government

grants and city contracts a governmental entity or a nongovernmental entity? The answer depends on other

specific circumstances discussed in the following paragraphs.

101.2 As discussed in section 107, the GASB has jurisdiction over accounting and financial reporting

standards for state and local governmental entities, and the Financial Accounting Standards Board (FASB) has

jurisdiction over standards for nongovernmental organizations. Thus, the determination of whether an entity is

a governmental entity has important accounting consequences.

101.3 In March 1996, the GASB and the FASB met jointly to clear the proposed AICPA Audit and Accounting

Guide, Health Care Organizations. During that meeting, the GASB and the FASB agreed on a definition of a



governmental organization that should be used in determining whether an entity should follow GAAP for

governments. (See the discussion beginning at paragraph 107.13.)

101.4 Rather than issue a Statement, the two Boards decided to clear AICPA audit and accounting guides

containing the definition, which, at the time, ranked as a level “b” source of GAAP. Previous nonauthoritative

guidance in this area consisted of a November 1993 GASB staff paper titled “Applicability of GASB

Standards” (the GASB Staff Paper). Readers of this Guide should be aware that determining that an

organization is governmental based on the definition does not supersede guidance in GASBS No. 14, The

Financial Reporting Entity, as amended, regarding whether to include the organization in a particular

governmental financial reporting entity. (See section 102.)

Definition

101.5 The following definition of a governmental entity is stated in paragraph 1.01 of SLG:

Public corporations and bodies corporate and politic are governmental entities. Other

entities are governmental entities if they have one or more of the following

characteristics:

• Popular election of officers or appointment (or approval) of a controlling majority of the

members of the organization's governing body by officials of one or more state or local

governments

• The potential for unilateral dissolution by a government with the net assets reverting to a

government

• The power to enact and enforce a tax levy

Furthermore, entities are presumed to be governmental if they have the ability to issue directly

(rather than through a state or municipal authority) debt that pays interest exempt from federal

taxation. However, entities possessing only that ability (to issue tax-exempt debt) and none of the

other governmental characteristics may rebut the presumption that they are governmental if their

determination is supported by compelling, relevant evidence.

Common Examples

101.6 Most potential governmental organizations will clearly fit into the first sentence of the definition in

paragraph 101.5. Black's Law Dictionary describes a public corporation as a municipality or a governmental

corporation that has been created to administer public affairs or as an instrumentality of the state, founded and

owned in the public interest. The following entities are common examples of governmental entities.

a. States, territories of the United States, and the District of Columbia.



b. Entities created by or under a state constitution, statute, statutory enabling legislation, or other local

ordinance, including—

(1) Cities.

(2) Counties.

(3) Towns.

(4) Townships.

(5) Villages.

(6) Parishes.

(7) Boroughs.

(8) School districts.

(9) Special districts.

(10) Public authorities.



c. Entities considered to be a “municipal corporation” because they are declared by statute to be a “public

corporation” or a “body corporate and politic.” Legally separate special-purpose entities may be so

designated so that they can avoid limitations or requirements placed on the general government, such as

limitations on debt issuance or civil service requirements.

Example of Determination as to Governmental Nature

101.7 As an example of the definition in paragraph 101.5, consider the question posed in paragraph 101.1

about the governmental nature of a community services center that provides youth recreation and job training

services and is financed through government grants and city contracts. Presented below are two situations in

which the center would be considered governmental and one in which it would not. Although these examples

are based on Illustration 1 in the GASB Staff Paper, they remain applicable based on the revised definition of a

governmental organization.

a. The center would be considered to be a governmental organization if it was created by a city ordinance

pursuant to state enabling legislation as a “body corporate and politic” and its governing board was

appointed by the city's mayor, and if the center could issue its own tax-exempt debt.

b. The center would be considered to be a governmental organization if it was incorporated as an IRC

Sec. 501(c)(3) not-for-profit corporation under the state's not-for-profit corporation laws and if its governing

board consisted entirely of city officials serving ex officio, that is, serving by virtue of their status as city

officials. The status as governmental would apply even if the center could not issue its own tax-exempt

debt.

c. The center would not be considered to be a governmental organization if it was organized by a private

civic group and incorporated as a Section 501(c)(3) not-for-profit corporation under the state's not-for-profit

corporation laws and if its governing board consisted entirely of private, nongovernmental individuals. It

would be nongovernmental because it was not created by a governmental organization, no governmental

organization has control over its operations, and it does not possess any characteristics of government,

such as popularly elected officials or the power to tax. The status as nongovernmental would apply even if

a governmental agency issued tax-exempt debt on the center's behalf.

In the first two situations, the center's accounting and financial reporting would be subject to the standards-

setting authority of the GASB. In the third situation, the center would be subject to the standards-setting

authority of the FASB. Note that this could result in different accounting and financial reporting by two entities

that engage in the same activities and differ only with respect to their being governmental or nongovernmental

organizations.

Checklist for Determining Whether an Entity Is Governmental



101.8 Appendix 1A presents a checklist that can be used as an aid in determining whether an entity is a

governmental entity based on the guidance discussed in the preceding paragraphs. Entities determined to be

nonprofit organizations should consult PPC's Guide to Preparing Nonprofit Financial Statements.


END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



102 Defining the Financial Reporting Entity

102 Defining the Financial Reporting Entity

102.1 Governments, such as cities, provide services and engage in activities through a variety of organizations

that may have differing degrees of autonomy from the city's elected officials and differing degrees of financial

accountability to the city. Which of these entities should be included in the city's financial statements? The

financial reporting entity refers to the units of government, organizations, and activities included in a particular

set of financial statements.

102.2 GASBS No. 14, The Financial Reporting Entity, as amended, establishes the criteria for determining

what makes up the financial reporting entity. The financial reporting entity is comprised of a primary

government and organizations for which the primary government is financially accountable. A primary

government is a state government, general purpose local government, or special-purpose government that

meets certain criteria of GASBS No. 14 denoting its independence from other state or local governments.

Those criteria include the ability to adopt its own budget, to set its own tax and other revenue rates, and to

issue debt without substantive approval from another entity.

102.3 One should not confuse the definition of a governmental entity discussed in section 101 with the GASBS

No. 14 criteria for a primary government. That is, an entity might meet the definition of a government but not

meet the definition of a primary government. Similarly, an entity may not meet the definition of a government

but may still be included as a component unit of a governmental entity, as discussed in paragraph 102.5.

GASB Statement No. 61, The Financial Reporting Entity: Omnibus

102.4 GASBS No. 61, The Financial Reporting Entity: Omnibus, issued in November 2010, amends GASBS

No. 14 and is effective for financial statements for periods beginning after June 15, 2012. GASBS No. 61

modifies the requirements for inclusion of component units in the financial reporting entity. Because of its

effective date, both pre-GASBS No. 61 guidance and GASBS No. 61 guidance are incorporated in this Guide.

Each is discussed separately in section 1009. The GASB encourages early application of GASBS No. 61.

Definition of Component Unit



102.5 A component unit is a legally separate organization for which the primary government is financially

accountable. GASBS No. 14 gives the indicators of financial accountability, such as ability to approve or modify

the potential component unit's budget or service fee rates or being obligated for the unit's debt. A component

unit may be a governmental entity, a nonprofit corporation, or a for-profit corporation. Only its relation to the

primary government is important in determining whether it is part of a governmental reporting entity. GASBS

No. 39, Determining Whether Certain Organizations Are Component Units, amends GASBS No. 14. It provides

guidance on when certain legally separate tax-exempt organizations for which the primary government is not

financially accountable (often referred to as “affiliated organizations”) should, nonetheless, be included in a

government's financial reporting entity. See the discussion beginning at paragraph 1005.34. (As discussed in

section 1009, GASBS No. 61 modifies the requirements for inclusion of component units in the financial

reporting entity when there is fiscal dependence. An organization previously included based on meeting the

fiscal dependency criterion would also need to have a financial benefit or burden relationship with the primary

government for it to be included in the reporting entity as a component unit. GASBS No. 14, paragraph 55, as

amended by GASBS No. 61, paragraph 10 (effective for fiscal years beginning after June 15, 2012), also

requires that a government include as a component unit any other organization in which it has a majority equity

interest for the purpose of directly facilitating government services. This expands a GASBS 14 requirement that

applied only to equity interests in business enterprises. GASBS No. 61 provides additional guidance on

reporting component units on the basis that it would be misleading to exclude them.)

Discrete Presentation of Component Units

102.6 There are two ways of reporting a nonfiduciary component unit in the financial statements of the

reporting entity: discrete presentation and blending. These are not options; the method for which the unit

qualifies must be followed. Most component units are discretely presented. Discrete presentation refers to

presentation of data for the component unit in a column to the right of the data columns for the primary

government. Fiduciary component units are aggregated with the corresponding fiduciary funds of a primary

government (GASBS No. 34, paragraph 106 and Question 7.77.4 of the GASB Comprehensive

Implementation Guide—2012-2013).

Blending of Component Units

102.7 Blending means that the component unit is so closely related to the primary government that it is, in

effect, the same as the primary government. In this case, the data for the component unit's funds are combined

with the data for corresponding funds of the primary government. (As discussed in section 1009, GASBS No.

61 amends the criteria for blending component units.)

Guidance on the Financial Reporting Entity

102.8 Sections 1005, 1006, and 1009 discuss the financial reporting entity in detail, and Appendix 10A

presents a checklist for determining the financial reporting entity. Appendix 10B, “Checklist for Evaluating

Potential Component Units and Reporting under GASBS No. 61,” presents a checklist for determining the

financial reporting entity based on the amended reporting entity requirements established by GASBS No. 61.

GASBS No. 61, discussed in section 1009, is effective for financial statements for periods beginning after June

15, 2012, with earlier application encouraged.




END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



103 The Government Environment

103 The Government Environment

103.1 Some aspects of the governmental sector are similar to the nongovernmental sector. For example, fees

may be charged to users of some government services, and the governmental service activity may be operated

on a cost-recovery basis. In general, the accounting and financial reporting for such “business-

type” (proprietary) activities are similar to the accounting for similar activities provided by business enterprises

in the private sector. Other aspects of the governmental sector, however, are quite different from the private

sector, and the accounting and financial reporting for those aspects are unique. Thus, it is important to

understand those unique environmental characteristics.

103.2 GASBC No. 1, Objectives of Financial Reporting, paragraph 13, identifies, among others, the following

significant government environmental characteristics:

a. Government structure and services—

(1) The representative form of government and separation of powers.

(2) The relationship of taxpayers to services received.

b. Control characteristics—

(1) The budget as an expression of public policy and as a method of providing control.

(2) The use of fund accounting for control purposes.



c. Other—

(1) The political process.

(2) Significant investment in non-revenue-producing capital assets.

The following paragraphs discuss these characteristics and how they affect governmental accounting and

financial reporting.

Governmental Structure and Budget

103.3 State and local governments operate as representative forms of government in which elected officials

and separate branches of government ultimately are accountable to the electorate. For example, the executive

branch prepares a budget that, when approved by the legislative branch, authorizes expenditures and has the

force of law. Citizens play a role in the budget-adoption process, for example, by commenting on a proposed

budget at budget hearings. Thus, the adopted budget becomes an expression of public policy of service

objectives and priorities. The legally adopted budget also serves as a form of control and a means of

demonstrating accountability.

103.4 The governmental accounting model recognizes the annual budget's significance by focusing on the

flows of current financial resources in the governmental fund financial statements. This measurement focus is

the same as or similar to the measurement focus used in many governments' legally adopted budgets. Using

this measurement focus, certain noncurrent, nonfinancial resources, liabilities, and expenditures are given

unique treatment so that these assets and liabilities are reported in the same manner as they are in most

legally adopted budgets. In addition, GAAP requires governments to present budget-to-actual comparisons for

their general fund and each major special revenue fund that has a legally adopted annual or biennial budget to

demonstrate whether government officials adhered to the spending authorizations and limitations inherent in

the budget. (See section 1401.)

103.5 Fund Accounting

Besides the budget, other legal and contractual provisions govern how governments may raise and spend

resources. For example, a debt agreement may specify the use for which borrowed monies may be spent and

may require the accumulation of resources for repaying the debt. Or, enabling legislation authorizing a new tax

or fee may restrict the revenues to use for a specific purpose. Or, a grant agreement may stipulate how grant

resources received from another level of government may be used. Fund accounting is a way governments



traditionally have controlled the use of resources designated for a specific purpose and have demonstrated

that legal or contractual provisions governing specific resources have been complied with. Even though

computerized accounting systems may have diminished the need for fund-based accounting systems, fund-

based financial reporting is still a way for governments to demonstrate that resources were used as authorized

and that other finance-related legal or contractual requirements were adhered to.

Relationship of Taxpayers to Services Received

103.6 In a representative democracy, the electorate as a whole authorizes, through actions of elected officials,

the imposition of taxes to raise resources needed to provide basic government services. However, individual

taxpayers must abide by that taxing decision and pay taxes whether they want to or not and whether they

receive all the authorized services or not. Because taxes may be based on factors such as income or the value

of property owned, the amount of taxes an individual citizen pays usually will not bear a direct relationship to

the value of tax-supported services that the taxpayer receives. For example, property owners must pay

property taxes to finance public education even though they do not have any children in public schools. The

fact that individual taxpayers are involuntary resource providers increases the need for governmental financial

reporting to demonstrate fiscal accountability to those resource providers.

Absence of Exchange Relationship, Profit Motive, and Competition

103.7 There is not an exchange relationship between resources provided to governments and many general

government services provided by governments. For example, the fire department generally does not bill a

citizen for its services in fighting a fire on the citizen's property. Also, governments provide many services that

the private sector would not find cost-effective or profitable to provide, for example, public transportation. The

result is that, in some instances, the government is the only provider of a service.

103.8 This monopolistic quality and the lack of a profit-motive for providing services can result in difficulty in

measuring the efficiency of many government operations. Unlike the private business sector, the government is

not measured in terms of profit or loss or return on shareowners' investment. Instead, governmental financial

reporting must provide other methods of evaluating the government's efficiency and effectiveness. The GASB's

Suggested Guidelines for Voluntary Reporting: SEA Performance Information, on service efforts and

accomplishments reporting is discussed in section 1014 of this Guide.

Political Nature of Government

103.9 Government is by definition a political process. Elected officials attempt to balance competing claims for

limited resources and conflicting taxpayer desires for more services without tax increases. Elected officials

often serve for relatively short terms and thus have a short-term horizon. There is some incentive for elected

officials to satisfy citizens' desires for current services by deferring other services or deferring necessary

maintenance of infrastructure (such as streets and bridges) and other non-revenue-producing capital assets.

Also, officials may pay for services with nonrecurring, short-term revenues or by deferring the cash effects of

certain types of transactions to more remote periods. In the past, the focus on measuring and recognizing long-

term or deferred commitments or liabilities had been given less emphasis than the focus on current resources

and expenditures that correspond to the time frame of the annual budget. However, management's discussion



and analysis (MD&A) and government-wide financial statements, required by GASBS No. 34, address the

longer-term focus, that is, interperiod equity. (See additional discussion at paragraph 105.3.)

Business-type Activities of Governments

103.10 Some of the unique characteristics of governmental activities discussed in the preceding paragraphs,

and the related accounting and financial reporting implications, can be better understood by contrasting those

characteristics with characteristics of business-type 2 (proprietary) activities that governments engage in.

Business-type activities have counterparts in the private sector and include activities such as water utilities,

sanitation services, golf courses, parking lots and garages, etc. These activities provide the same types of

services as are provided by private enterprises. Thus, often there is competition that may be absent from

governmental activities. If there is competition, the customers have a choice whether to use the government's

proprietary service or not (unless the activity is a monopoly of a necessary service, such as a water utility).

103.11 Exchange Relationship and User Fees

Like private enterprises, government business-type activities charge user fees and thus have an exchange

relationship with service recipients. The government-owned activity may charge user fees at a level that will

recover all costs. However, the activity may be subsidized by the government to keep user fees at a level

considered politically or economically acceptable. In either case, however, fund financial reporting for these

activities focuses on measuring all costs of the activity, including, for example, depreciation and costs related

to long-term commitments. It also focuses on reporting operating income, either to determine the necessary

level of user fees or to determine the extent of subsidization necessary. This measurement focus concept is

the same as for private-sector enterprises.

103.12 Revenue-producing Assets

Business-type activities of governments usually are capital intensive. But because the capital assets are

revenue-producing (unlike most capital assets associated with governmental activities), there may be less

incentive to defer necessary maintenance. Maintenance will be performed as necessary to provide effective

and efficient service that will generate revenue. Because the activity reports depreciation and other long-term

costs, the related capital assets and long-term liabilities are included in the activity's statement of net position.

103.13 Different Status of Budget

Because government business-type activities are fully or partially self-supporting from user fees (rather than

from taxes), and because they have an exchange relationship with the customers and some relationship

between user fees and services, there is less need for a legally adopted budget like that for governmental

activities. Business-type activities use budgets for internal planning and control, but the budgets generally do

not have the legal status or political nature of governmental activity budgets. For instance, usually they are not

subject to public comment and are not formally adopted by a legislature or governing body.

103.14 Because the budget for proprietary activities generally is not a legal authorization of, or limitation on,

spending, there is less need to demonstrate compliance with it. Thus, GAAP financial reporting includes

budgetary comparisons only for certain governmental funds (activities).



103.15 Absence of Fund Accounting

For similar reasons, business-type activities generally do not use fund accounting in their financial reporting

(although the entire activity may be reported in one separate enterprise fund when the activity is included in the

financial report of the government as a whole). Business-type activities typically may decide how to spend their

revenues and resources to provide the service in the most efficient and effective way. Because the resources

usually are not restricted to specified uses, there is no need to segregate the resources and their expenditures

into funds for financial reporting purposes. (Debt agreements may specify how debt proceeds are to be used

and may require the maintenance of certain “funds,” but those funds are treated as accounts for financial

reporting purposes and are not equivalent to fund accounting.)

103.16 The differences discussed in the preceding paragraphs are not absolute. For one thing, the

organizational demarcation between governmental and business-type activities is not always clear. For

example, one government may organize its parks as a department of the general government while another

government may organize them as a separate business-type activity. As previously mentioned, business-type

activities may be subsidized, and therefore subject to the same political process of obtaining tax-supported

subsidies and to resulting heightened accountability to the taxpayers. The activities may be a monopoly of

necessary service, which affects the relationship with the service recipients. Rates, particularly of utilities, may

be subject to regulation, which also increases political considerations and affects the relationship with service

recipients. The activity may receive government grants that have restrictions on their use and require

demonstration of compliance with those restrictions.

2Both GASBC No. 1 and GASBS No. 34 use the terms governmental activities (or governmental-type) and

business-type activities. However, those terms are defined only in GASBS No. 34, paragraph 15.

Governmental activities “generally are financed through taxes, intergovernmental revenues, and other

nonexchange revenues.” Business-type activities “are financed in whole or in part by fees charged to external

parties for goods and services.” Governments are required to report business-type activities separately in their

government-wide financial statements. See paragraph 108.12.


END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



104 Uses and Users of Governmental Financial Reports

104 Uses and Users of Governmental Financial Reports

Users

104.1 Who are the users of governmental external financial reports? GASBC No. 1, paragraphs 30-31,

identifies the following user groups:

a. Citizens. The government is primarily accountable to the citizenry. This user group includes citizen

voters, taxpayers, and service recipients, the media, and advocate groups.

b. Legislative and Oversight Bodies. These bodies represent the citizens and include members of state

legislatures, county commissions, city councils, boards of trustees, school boards, and executive branch

officials who have oversight responsibility for other levels of government or for separately organized

business-type activities.

c. Investors and Creditors. Investors and creditors include individual and institutional investors and

creditors, municipal security underwriters, bond rating agencies, bond insurers, and other financial

institutions.

Internal government management officials use external financial statements, but they are not identified as a

primary user because they have access to the information through internal financial reports.

Uses

104.2 What use do the users identified in the preceding paragraph make of external governmental financial

statements? GASBC No. 1, paragraph 32, lists the following uses:

a. Comparing actual financial results with the legally adopted budget.



b. Assessing financial condition and results of operations.

c. Assessing compliance with finance-related legal and contractual requirements.

d. Assessing efficiency and effectiveness.

The accounting and financial reporting objectives and standards discussed in this Guide are influenced by the

uses made of governmental financial statements. The following paragraphs briefly explain these uses.

104.3 Comparing Actual and Budgeted Results

Paragraph 103.3 explains the special significance of governments' legally adopted budgets. All user groups

use governmental financial reports to compare actual to budgeted results. Citizens and legislative and

oversight bodies make the comparison to assess whether resources were used as authorized. Other groups

assess whether deviations from the budget reflect management weaknesses, poor budgeting practices, or

other circumstances. As explained in paragraph 103.13, the budget has less significance for business-type

activities. Thus, users of financial statements of business-type activities typically are less interested in

comparing actual and budgeted results.

104.4 Assessing Financial Condition and Results of Operations

Citizens assess whether the reported financial condition and operating results indicate that the government can

continue to provide the current level of services with the current level of resources and the likelihood of tax or

service fee increases. Legislative and oversight bodies use reported information in planning budgets and

programs and to determine the need for tax, fee, or subsidy changes. Investors and creditors use reported

information on financial condition to assess the government's ability to meet its debt service obligations.

104.5 Assessing Compliance with Finance-related Legal and Contractual Requirements

Legal and contractual provisions such as debt covenants, grant restrictions, and statutory taxing or debt limits

may control government activities or expenditures. Grantors use governmental fund financial statements to

assess whether grant requirements have been adhered to, and investors and creditors use them to assess

compliance with debt covenants. Citizens, too, are concerned with the government's compliance with such

legal and contractual provisions because of the possible consequence of noncompliance, such as loss of grant

funds.

104.6 Assessing Efficiency and Effectiveness



Citizens and legislative and oversight bodies are particularly concerned with the economy, efficiency, and

effectiveness with which government uses resources provided through taxes or grants from other levels of

government.


END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



105 Objectives of Governmental Financial Reporting

105 Objectives of Governmental Financial Reporting

105.1 GASBC No. 1 provides the conceptual framework for accounting and financial reporting for state and

local governments. In GASBC No. 1 (GASB Cod. Appendix B), the GASB articulated the broad external

financial reporting objectives that underlie existing, or will influence future, accounting and financial reporting

standards. Many, but not all, of the reporting objectives have been achieved in the GASBS No. 34 financial

reporting model. Familiarity with the objectives can increase understanding of the nature and purpose of

existing standards and the trend of future standards.

Accountability

105.2 GASBC No. 1, paragraph 56, states that “accountability is the cornerstone of all financial reporting in

government.” That paragraph describes “accountability” as:

Accountability is the cornerstone of all financial reporting in government. . . . The dictionary

defines accountable as “being obliged to explain one's actions, to justify what one does.”

Accountability requires governments to answer to the citizenry—to justify the raising of public

resources and the purposes for which they are used.

Accountability implies stewardship. A government is accountable to citizens for its stewardship of resources

because individual taxpayers provide the resources involuntarily. Many laws and constitutions reflect the

concept of the accountability of government to the people. So should governmental accounting. In paragraph

58, the GASB expressed the conclusion that governmental financial reporting should demonstrate

accountability by providing information that will assist in assessing whether a government was “operated within

the legal constraints imposed by the citizenry.”

Interperiod Equity

105.3 GASBC No. 1, paragraph 61, notes that “interperiod equity is a significant part of accountability and is

fundamental to public administration.” Although the term “interperiod equity” is not defined in GASBC No. 1 or

in other accounting literature, the Board does discuss the term in the context of balanced budget laws in

paragraph 60. It notes that the intent of those laws is that “the current generation of citizens should not be able



to shift the burden of paying for current-year services to future-year taxpayers.” Paragraph 77 introduces other

facets of interperiod equity, specifically, whether previously accumulated resources were used up in providing

service in the current period or whether current-year revenues were not only sufficient but also increased

accumulated resources. As far back as the 1920s, commentators noted that the ease of issuing public debt

often led governments to finance unfair portions of expenditures through the sales of bonds and thus to unfairly

shift the repayment burden to future years. Currently, there is not a perceived problem of capital debt being

issued with a term that exceeds the life of the asset it finances; however, issues involving interperiod equity

exist with respect to operating debt, unfunded pension contributions, deferred maintenance, claims and

judgments, compensated absences, and other postemployment benefits.

105.4 Many state and local laws and constitutions recognize the need for interperiod equity. For instance, most

state and local governments have laws requiring balanced budgets and limiting debt to amounts that can be

repaid over the life of the assets that are acquired with the debt. Because of the political nature of government

and the resulting short-term outlook of elected officials discussed in paragraph 103.9, there is a temptation to

ignore interperiod equity when providing services to the current electorate. Thus, as GASBC No. 1, paragraph

59, explains, these laws attempt to “achieve fairness from one year, one term of office, or one generation to

another.”

105.5 GASBC No. 1, paragraph 61, states that an objective of financial reporting is to provide information to

assess whether current-year revenues are sufficient to pay for current-year services or whether future-year

taxpayers will have to assume the burden for those services.

105.6 The concept of interperiod equity is related to the concept of accountability in that government officials

are accountable for compliance with balanced budget and debt limitation laws that seek to achieve interperiod

equity. Thus, as mentioned in paragraph 105.2, financial reporting that demonstrates accountability by

providing information that will assist in assessing whether a government was “operated within the legal

constraints imposed by the citizenry” also demonstrates the extent of interperiod equity. The financial reporting

objectives of GASBC No. 1 discussed in the following paragraphs reflect the primacy of accountability and

interperiod equity.

Financial Reporting Objectives

105.7 From this focus on accountability and interperiod equity, the GASB established three basic objectives of

financial reporting by state and local governments. GASBC No. 1, paragraphs 77-79, presents the three main

financial reporting objectives, each with three subobjectives. The objectives apply to both governmental and

business-type activities because both types are part of a government and thus are accountable to the public.

There may be, however, differences in emphasis in applying the objectives to each type of activity. The

objectives are as follows:

a. Assist in Assessing Accountability. Financial reporting should assist in fulfilling government's duty to be

publicly accountable and should enable users to assess that accountability.



(1) Financial reporting should provide information to determine whether current-year revenues

were sufficient to pay for current-year services. This objective implies that financial reporting

should enable the assessment of interperiod equity.

(2) Financial reporting should demonstrate whether resources were obtained and used in

accordance with the legally adopted budget and should demonstrate compliance with other

finance-related legal or contractual requirements.

(3) Financial reporting should provide information to assist users in assessing the governmental

entity's service efforts, costs, and accomplishments. Such information will help users assess

government's efficiency and effectiveness.

b. Assist in Assessing Operating Results. Financial reporting should assist users in evaluating the

governmental entity's operating results for the year.

(1) Financial reporting should provide information about sources and uses of financial resources.

(2) Financial reporting should provide information about how the governmental entity financed its

activities and met its cash requirements.

(3) Financial reporting should provide information necessary to determine whether the entity's

financial position improved or deteriorated as a result of the year's operations.

c. Assist in Assessing Services and Obligations. Financial reporting should assist users in assessing the

level of services that the governmental entity can provide and its ability to meet its obligations as they

become due.



(1) Financial reporting should provide information about the governmental entity's financial

position and condition and about resources and obligations that are both actual and contingent,

current and noncurrent.

Because the major sources of resources are taxes and debt issues, financial reporting should

also provide information about tax sources, tax limitations, and debt limitations. (Some of this

information is presented in the operating statement and some in statistical schedules required to

be included in government CAFRs.)

(2) Financial reporting should provide information about physical and other nonfinancial

resources having useful lives that extend beyond the current year, including information useful in

assessing the service potential of those resources and long-term and short-term capital needs.

(3) Financial reporting should disclose legal or contractual restrictions on resources and risks of

potential loss of resources.


END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



106 Financial Reporting Objectives and the Governmental Financial Reporting Model

106 Financial Reporting Objectives and the Governmental

Financial Reporting Model

106.1 GASBS No. 34, which established a new and very different financial reporting model for governments in

1999, provided the GASB with its first opportunity to explore exactly what it meant by making accountability

(and interperiod equity) the cornerstone of governmental financial reporting. GASBC No. 1 established a very

diverse list of objectives of financial reporting (paragraph 105.7). To achieve as many objectives as possible

(and meet as many user needs as possible), the GASB found itself in the position of having to distinguish

between types of accountability. Paragraph 204 of the GASBS No. 34 Basis for Conclusions (BFC) cites both

fiscal and operational accountability:

Fiscal accountability is the responsibility of governments to justify that their actions in the current

period have complied with public decisions concerning the raising and spending of public

moneys in the short term (usually one budgetary cycle or one year).

. . . [O]perational accountability is governments' responsibility to report the extent to which they

have met their operating objectives efficiently and effectively, using all resources available for

that purpose, and whether they can continue to meet their objectives for the foreseeable future.

[Emphasis added.]

GASBS No. 34, BFC paragraph 207, notes that the use of fund accounting and financial statements that show

the sources and uses of current financial resources (e.g., taxes, capital outlay, debt service) are accounting

and reporting practices that help demonstrate fiscal accountability.

106.2 On the other hand, the use of the economic resources measurement focus and full accrual basis of

accounting required in the government-wide financial statements puts users in a better position to assess

operational accountability. By providing information about all operating costs (both financial and capital), users

can assess the level of services that can be provided as well as the effect that current period operations have

on future resource needs. As discussed in BFC paragraph 223, operating costs provide a consistent basis for

evaluating whether revenues were sufficient to cover costs, both for the current period and over time.



106.3 The GASB's perceived need to provide information about both operational and fiscal accountability

eventually caused it to require three different types of financial statements/schedules within a single set of

basic financial statements and RSI, including:

• Government-wide Financial Statements—consisting of a statement of net position and a statement of

activities. These statements provide aggregated information for the government as a whole prepared

using the economic resources measurement focus and full accrual basis of accounting and meet the need

for operational accountability.

• Fund Financial Statements—consisting of governmental fund financial statements, proprietary fund

financial statements, and fiduciary fund financial statements. Governmental fund statements, including a

balance sheet and statement of revenues, expenditures, and changes in fund balances, are prepared

using the current financial resources measurement focus and modified accrual basis of accounting.

Governmental fund statements provide information about fiscal accountability by focusing on current

financial resources and using a measurement focus that is similar to most governments' legally adopted

budgets.

• Budgetary Comparison Schedules/Statements—presented only for a government's general fund (or its

equivalent) and each major special revenue fund that has a legally adopted budget. These

schedules/statements provide fiscal accountability by comparing original and final budgeted revenues and

expenditures to actual revenues and expenditures on the entity's own budgetary basis of accounting.

106.4 Section 108 provides an overview of the governmental financial reporting model. Paragraphs 1001.12

and 1001.18 discuss other, more specific GASBC No. 1 objectives met by government-wide financial

statements and fund financial statements, respectively. Section 1501 discusses the GASBC No. 1 objectives

met by management's discussion and analysis (MD&A).


END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



107 Establishing GAAP for State and Local Governments

107 Establishing GAAP for State and Local Governments

GAAP for Governments—THE BASICS

• The AICPA Code of Professional Conduct Rule 203 names the GASB as the body with the authority to

establish accounting principles for state and local governments.

• The hierarchy of GAAP for governments is set forth in GASBS No. 55 (Exhibit 1-2).

• For state and local governments, GASB pronouncements take precedence over standards set by any other

organization.

• GASBS No. 62 codifies pre-November 30, 1989 accounting and reporting requirements contained in FASB

and AICPA pronouncements that are applicable to state and local governments, modified, as appropriate, for

governments.

History of Standards Setting

107.1 The first formal government standards setting can be traced back to the establishment of the National

Committee on Municipal Accounting (NCMA) in 1934. In 1968, a group called the National Committee on

Governmental Accounting, which had replaced the NCMA, issued a document titled Governmental Accounting,

Auditing, and Financial Reporting (the 1968 GAAFR, also called The Blue Book). It represented an

authoritative compilation in one document of governmental accounting principles that had been developed in

various documents by several predecessor groups. In 1974, the AICPA issued an Industry Audit Guide titled

Audits of State and Local Governmental Units (1974 ASLGU), which endorsed and recognized (subject to

some modification) the general acceptance of the accounting principles in the 1968 GAAFR.

107.2 The National Council on Governmental Accounting

In 1979, the National Council on Governmental Accounting (NCGA), which had replaced the National

Committee on Governmental Accounting, issued Statement 1 (NCGAS 1). NCGAS 1 updated and expanded

the accounting principles in the 1968 GAAFR as they had been modified by the 1974 ASLGU. The



Government Finance Officers Association (GFOA) was the sponsor of, and publisher for, the NCGA and its

predecessor committee. The GFOA published the 1968 GAAFR and also published revised editions of it in

1980, 1988, 1994, 2001, 2005, and 2012 as a nonauthoritative guide to application of GAAP for governments.

107.3 The NCGA issued several Statements and Interpretations on accounting principles for governmental

units. However, there were questions about who was the standards-setter for governments, particularly when

conflicts arose between standards in NCGA Statements and in FASB Statements or when a FASB Statement

addressed a situation not addressed in an NCGA Statement. The GASB was established in an attempt to

resolve this jurisdiction question.

The Governmental Accounting Standards Board

107.4 The GASB is the standards-setting body for state and local governmental accounting. The GASB was

established in 1984 and replaced the NCGA. The GASB operates much like the FASB (being subject to

oversight of the Financial Accounting Foundation (FAF) Board of Trustees, having a full-time staff, and

following a due-process procedure with meetings open to the public. The GASB issues pronouncements,

called Statements, Interpretations, Technical Bulletins, etc. Exhibit 1-1 presents useful information about the

GASB (board members, how to order documents, etc.).

Exhibit 1-1

Facts about the GASB

Name: Governmental Accounting Standards Board

401 Merritt 7, P.O. Box 5116

Norwalk, Connecticut 06856-5116

(203) 847-0700

Telephone orders: (800) 748-0659

Website: www.gasb.org

Oversight: Financial Accounting Foundation (FAF) provides funding for the GASB and

nominates Board members. The FAF provides similar oversight for the FASB and

has authority to resolve any jurisdictional problems between the GASB and FASB.

Governmental Accounting Standards Advisory Council (GASAC) assists in raising

funds for the GASB and identifies topics and technical projects for the GASB's

agenda. GASAC does not have any veto power over GASB technical matters or

pronouncements. Its members represent, among others, the AICPA, federal, state,

and municipal organizations, and the private sector (bond rating agencies, etc.).

Members:1. Robert H. Attmore, Chairman, former New York Deputy State Comptroller

(full time) (term expires June 30, 2014).

2. James E. Brown, former partner in the National Office Accounting and

Auditing Quality Control Department, BKD LLP (part-time) (term expires June

30, 2017).

3. William W. Fish, former Chief Investment Officer of Chartis U.S., a property

and casualty subsidiary of AIG and former Head of Municipals at AIG

Investments (part-time) (term expires June 30, 2016).



4. Michael H. Granof, Ernst & Young Distinguished Centennial Professor of the

McCombs School of Business at the University of Texas at Austin (part time)

(term expires June 30, 2015).

5. David E. Sundstrom, Auditor-Controller, Orange County, California (part-

time) (term expires June 30, 2014)

6. Jan I. Sylvis, Chief of Accounts, Department of Finance and Administration,

State of Tennessee (part time) (term expires June 30, 2017).

7. Marcia L. Taylor, Assistant Manager, municipality of Mt. Lebanon,

Pennsylvania (part-time) (term expires June 30, 2015).

Types of

Pronouncements:1. Authoritative

a. Statements of the Governmental Accounting Standards Board;

b. Interpretations;

c. Technical Bulletins written by the GASB staff;

d. Implementation Guides on individual pronouncements (see paragraph

107.10);

e. Comprehensive Implementation Guide (see paragraph 107.11);

f. Codification of Statements and Interpretations; and

g. Original Pronouncements of Statements, Interpretations, and Technical

Bulletins.

2. Nonauthoritative

a. Concepts Statements;

b. Research Reports;



c. Invitations to Comment;

d. Discussion Memorandums;

e. Exposure Drafts;

f. Proposed Technical Bulletins;

g. Suggested Guidelines; and

h. The GASB Report—a monthly newsletter of GASB activity.

Obtaining

Pronouncements:1. Subscribers to this Guide on Checkpoint are provided with automatic links to

GASB Statements, Interpretations, Technical Bulletins, Concepts Statements,

Exposure Drafts, Comprehensive Implementation Guides, and the GASB

Codification.

2. Information about GASB publications may be obtained from the GASB

website at www.gasb.org or the GASB Order Department.

3. GASB Statements and Interpretations are published in the Official Releases

section at the back of the Journal of Accountancy soon after they are issued. All

AICPA members receive the Journal of Accountancy.

____________________

107.5 In February 2008, the FAF approved changes to its own structure as well as to the structure of both the

FASB and GASB. The FAF's own structure changed in that government organizations are permitted to

nominate trustees but the final decision on appointment rests with the trustees. In the past, organizations such

as the Government Finance Officers Association, appointed the trustee of their choice. The changes also

increased the level of oversight that the FAF has over both the FASB and GASB. Other changes affected two

aspects of the GASB itself. First, the FAF agreed to secure a stable and permanent funding source for the

GASB. Second, the FAF changed the agenda-setting process for the GASB by vesting the GASB chairperson

with the power to set the Board's agenda. Previously, the GASB's agenda was driven by the approval of the

majority of the Board.



107.6 Since it was established in 1984, the GASB has relied on contributions from users, voluntary

assessments from state governments based on percentages established by the National Association of State

Auditors, Comptrollers, and Treasurers, and sales of publications. Pursuant to the provisions of Section 978(a)

of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), the SEC directed the Financial

Industry Regulatory Authority (FINRA) to establish rules for the assessment and collection of accounting

support fees from FINRA's members who engage in secondary trading of municipal securities in order to fund

the annual operating budget of the GASB. GASB began receiving this funding in 2012. It is now the

predominant source of funding.

107.7 The GASB's first authoritative pronouncement was Statement No. 1 (GASBS No. 1), Authoritative Status

of NCGA Pronouncements and AICPA Industry Audit Guide. GASBS No. 1 recognized the Statements and

Interpretations that had been issued by the NCGA and the accounting guidance in the 1974 ASLGU and

related Statements of Position as being encompassed within GAAP for governmental units. GASBS No. 1

continues those standards in force until they are superseded by GASB pronouncements, and they have been

incorporated in the GASB Codification of Governmental Accounting and Financial Reporting Standards (the

GASB Codification) and the GASB Original Pronouncements.

The GASB Codification

107.8 In 1986, the GASB began issuing pronouncements that supersede portions of previous authoritative

standards. Each GASB Statement includes Codification instructions that indicate what literature it supersedes,

if any. Also, the GASB annually updates the Codification to reflect current standards. Each paragraph in the

GASB Codification indicates its origin, for example, from a certain paragraph of a particular NCGA Statement

or from a certain paragraph of a particular GASB Statement.

107.9 The addition of new guidance or removal of superseded guidance in the Codification can cause its

paragraph numbers to change when it is updated. The Codification does not indicate where paragraph

numbers have changed from prior editions. For this reason, this Guide refers to the original GASB

pronouncement and paragraph number, where possible, instead of to its specific location in the Codification.

(However, the broad Codification section number in which the GASB Statement is codified is also indicated.)

An exception is Codification paragraphs that originated in NCGA Statements rather than in GASB

pronouncements; those paragraphs are referred to by their GASB Codification location. An appendix in the

Codification presents a finding list of original pronouncements that indicates either where each paragraph of

each NCGA or GASB Statement appears in the Codification or that it was superseded by another GASB

Statement. Also, as previously mentioned, the GASB annually publishes a book of all original pronouncements.

GASB Comprehensive Implementation Guide

107.10 In 1991, the GASB began to issue Implementation Guides for some of its more detailed standards. As

of October 2012, the GASB had issued 12 Implementation Guides, including:

• Guide to Implementation of GASB Statement 3 on Deposit with Financial Institutions, Investments

(Including Repurchase Agreements), and Reverse Repurchase Agreements: Questions and Answers



• Guide to Implementation of GASB Statement 9 on Reporting Cash Flows of Proprietary and

Nonexpendable Trust Funds and Governmental Activities That Use Proprietary Fund Accounting:

Questions and Answers

• Guide to Implementation of GASB Statement 10 on Accounting and Financial Reporting for Risk

Financing and Related Insurance Issues: Questions and Answers

• Guide to Implementation of GASB Statement 14 on the Financial Reporting Entity: Questions and

Answers

• Guide to Implementation of GASB Statements 25, 26, and 27 on Pension Reporting and Disclosure by

State and Local Government Plans and Employers: Questions and Answers

• Guide to Implementation of GASB Statement 31 on Accounting and Financial Reporting for Certain

Investments and for External Investment Pools: Questions and Answers

• Guide to Implementation of GASB Statement 34 on Basic Financial Statements—and Management's

Discussion and Analysis—for State and Local Governments: Questions and Answers

• Guide to Implementation of Statement 34 and Related Pronouncements: Questions and Answers

• Guide to Implementation of GASB Statement 40 on Deposit and Investment Risk Disclosures: Questions

and Answers

• Guide to Implementation of GASB Statements 43 and 45 on Other Postemployment Benefits: Questions

and Answers

• Guide to Implementation of GASB Statement 44 on the Statistical Section: Questions and Answers



• Guide to Implementation of GASB Statement 53 on Accounting and Financial Reporting for Derivative

Instruments: Questions and Answers

Guidance in GASB implementation guides is limited to clarifying, explaining, or elaborating on an underlying

standard. They are classified as category d in the hierarchy of GAAP. (See the discussion beginning at

paragraph 107.16.)

107.11 In May 2003, the GASB began to issue an annual publication—a comprehensive implementation guide.

The GASB Comprehensive Implementation Guide is a consolidation of all previously issued guides. It not only

codifies the questions and answers in these guides, but also updates the answers, as appropriate, to recognize

the effects of any new standards issued since the original guides (listed in paragraph 107.10) were issued. In

addition, some new questions are added and some are deleted. The 2012-2013 edition of the guide is based

on all GASB standards through GASBS No. 66, Technical Corrections—2012—an amendment of GASB

Statements No. 10 and No. 62, GASBI No. 6, Recognition and Measurement of Certain Liabilities and

Expenditures in Governmental Fund Financial Statements, and Technical Bulletin 2008-1, Determining the

Annual Required Contribution Adjustment for Postemployment Benefits.

107.12 All references to implementation guides in this Guide are to the GASB Comprehensive Implementation

Guide—2012-2013.

Authority of GASB Pronouncements

107.13 Original Authority

When the GASB was established, it was agreed that the GASB would establish accounting and financial

reporting standards for activities and transactions of state and local governmental entities and that the FASB

would continue to establish standards for all other entities. (Section 101 gives guidance on determining a

governmental entity for this purpose.)

107.14 The Council of the AICPA designated the GASB as the body with the authority to establish accounting

principles for state and local governmental entities under Rule 203 of the AICPA Code of Professional

Conduct. Rule 203 provides that an AICPA member may not express an opinion that financial statements

conform to GAAP if the statements contain a departure from an accounting principle promulgated by a body

designated by the AICPA Council as having authority to establish accounting principles. The Council action

gave GASB pronouncements an equivalent status to FASB pronouncements; that is, both represented the

highest level of authoritative support for governmental accounting principles, and if there was not a GASB

pronouncement applicable to particular circumstances of a governmental entity, relevant FASB

pronouncements applied.

107.15 The result of this arrangement was that each new FASB pronouncement would apply to governmental

entities unless the subject matter was covered by a GASB pronouncement or unless the GASB took specific

action stating that the new FASB pronouncement was not applicable to governmental entities (“negative

standards-setting”). For example, when the FASB issued FASBS No. 87, Employers' Accounting for Pensions,

establishing new employer pension accounting standards, the GASB issued GASBS No. 4 prohibiting



governmental employers from adopting FASBS No. 87 because the GASB had its own pension accounting

project in progress.

107.16 Current Authority and Hierarchy of GAAP for Governmental Entities

In March 2009, the GASB issued Statement No. 55 (GASB Cod. Sec. 1000), The Hierarchy of Generally

Accepted Accounting Principles for State and Local Governments. GASBS No. 55 establishes the hierarchy of

GAAP within the GASB literature. Previously, the hierarchy of GAAP could be found only in the auditing

literature—SAS No. 69, The Meaning of Present Fairly in Accordance with Generally Accepted Accounting

Principles. As shown in Exhibit 1-2, GASBS No. 55 establishes four categories of accounting principles that are

generally accepted in descending order of authority. In addition, GASBS No. 55, paragraphs 5 and 6,

discusses other sources of guidance when categories a. through d. do not provide guidance for a particular

transaction or event.

107.17 Using Similar Guidance and Prohibited Applications of GAAP.

When specific guidance in not available in categories a through d, GASBS No. 55, paragraph 5, states that

governments should consider accounting principles for similar transactions or events within those categories

and may consider other accounting literature. This should not be done, however, when a pronouncement

prohibits its application to that particular transaction or event or otherwise indicates that the accounting

treatment should not be applied by analogy. For example, GASBS No. 49, Accounting and Financial Reporting

for Pollution Remediation Obligations, prohibits its application to future pollution remediation activities that are

required upon retirement of an asset.

107.18 Other Accounting Literature.

Other accounting literature should be applied when there is no “similar” guidance. GASBS No. 55, paragraph

6, “defines” other accounting literature by giving examples, including the following:

• GASB Concepts Statements;

• Pronouncements in categories a-d of the FASB GAAP hierarchy for nongovernmental entities if not

specifically made applicable to state and local governmental entities by the GASB (However, the FASB

amended its hierarchy in June 2009 so that it now consists of a single category. See the discussion

beginning at paragraph 107.19.);

• Financial Accounting Standards Board Concepts Statements;

• Federal Accounting Standards Advisory Board (FASAB) Statements, Interpretations, Technical Bulletins,

and Concepts Statements;



• AICPA Issues Papers;

• International Public Sector Accounting Standards of the International Public Sector Accounting

Standards Board or International Financial Reporting Standards of the International Accounting Standards

Board, or pronouncements of other professional associations or regulatory agencies;

• AICPA Technical Information Service Inquiries and Replies as Technical Practice Aids; and

• Accounting textbooks, handbooks, and articles.

107.19 The GASB notes that for all of these examples, the appropriateness of using other accounting literature

depends on its relevance, the specificity of its guidance, and the authority of the literature's issuer or author.

For example, GASBS No. 55 notes that a GASB Concepts Statement would normally have more influence than

other sources of other accounting literature.

107.20 As discussed beginning at paragraph 107.21, the GASB issued Statement No. 62, Codification of

Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA

Pronouncements, in December 2010. That Statement codifies pre-November 30, 1989 accounting and

reporting standards contained in FASB and AICPA pronouncements that are applicable to state and local

governments. As part of the codification process, the GASB identified a number of pre-November 30, 1989

FASB and AICPA pronouncements that should continue to be considered as part of other accounting literature.

These pronouncements are listed in Appendix 1B, Section 2, of this Guide. In addition, the GASB identified pre

-November 30, 1989 guidance related to government combinations and disposals of a segment of a business

that governments should continue to apply pending completion of GASB projects on those topics. These

pronouncements are listed in Appendix 1B, Section 3, of this Guide. All other pre-November 30, 1989 FASB

and AICPA pronouncements should be excluded from consideration when looking for guidance on a

transaction or activity not addressed in the four levels of the GASB hierarchy (Exhibit 1-2).

Exhibit 1-2

GASBS No. 55 GAAP Hierarchy for State and Local Governments

a. Officially established accounting principles—GASB Statements of Governmental Accounting Standards and

Interpretations. GASB Statements and Interpretations are periodically incorporated in the Codification of

Governmental Accounting and Financial Reporting Standards.



b. GASB Technical Bulletins and, if specifically made applicable to state and local governmental entities by the

AICPA and cleared by the GASB, AICPA Industry Audit and Accounting Guides, and AICPA Statements of

Position. (AICPA documents made applicable to governments should be presumed to have been cleared by the

GASB.)a

c. AICPA Practice Bulletins, if specifically made applicable to state and local governmental entities and cleared by

the GASB,a

as well as consensus positions of a group of accountants organized by the GASB that attempts to

reach consensus positions on accounting issues applicable to state and local governmental entities. b

d. Implementation guides (Q&As) published by the GASB staff, as well as practices that are widely recognized

and prevalent in state and local government.

GASBS No. 55, paragraph 6, identifies what was previously known as GAAP hierarchy category e, now as other

accounting literature. Other accounting literature is “defined” by giving examples, such as GASB Concepts Statements

and certain publications issued by other technical bodies (FASB, AICPA, FASAB, etc.), as well as accounting

textbooks, handbooks, and articles. See paragraph 107.18.

Notes:

aPronouncements specifically made applicable to state and local governments are presumed to have been

cleared by the GASB unless the pronouncement states otherwise.

b The GASB has not yet organized such a group.

____________________

GASBS No. 62 Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements

107.21 GASBS No. 62 codifies the requirements of all pre-November 30, 1989 FASB and AICPA

pronouncements that apply to state and local governments (that is, that are relevant to governments and do

not conflict with or contradict GASB pronouncements). As a result, governmental- and business-type activities

and proprietary funds will no longer have to consider pre-November 30, 1989 FASB or AICPA pronouncements

nor will enterprise funds be permitted to apply “new” FASB pronouncements issued after November 30, 1989.

The latter option was permitted under GASBS No. 20, paragraph 7. This Guide has been updated for GASBS

No. 62 as shown in Exhibit 1-3 with the exception of the activities/transactions listed in paragraph 100.12.

Exhibit 1-3

GASBS No. 62 Guidance Incorporated in This Guide

GASBS No. 62 Activity or Transaction GASBS No. 62

Paragraphs

Principal Discussion in this

Guide

Capitalization of interest costs 5-22 Section 709

Revenue recognition for exchange transactions 23 Section 409



GASBS No. 62 Activity or Transaction GASBS No. 62

Paragraphs

Principal Discussion in this

Guide

Revenue recognition when right of return exists 24-28 Section 409

Statement of net position classification: current assets,

allowances, and current liabilities

29-35 Beginning at para.1106.3

Statement of net position classification: classification of

short-term obligations expected to be refinanced36-44 Section 906

Special and extraordinary items 45-50 Beginning at para. 1205.9

Comparative financial statements 51-53 Beginning at para. 1105.8

Related parties 54-57 Paragraph 1310.2

Prior-period adjustments, accounting changes, changes

in estimates, and error corrections58-85 Section 1011

Changes in reporting entity 86-87 Section 1011

Disclosure of accounting policies 90-95 Section 1303

Contingencies 96-113 Section 507

Long-term construction-type contracts 114-123 Section 409

Extinguishments of debt 124-127 Section 909

Troubled debt restructuring 128-164 Section 910

Imputation of interest costs 173-187 Paragraph 904.20

Inventory 188-201 Section 503

Investments in common stock 202-210 Section 608

Leases—Lessors 211-271 —

Leases—Lessees 211-271 Section 703

Nonmonetary transactions 272-281 Section 708

Right of offset 501 Throughout

____________________

AICPA Pronouncements Specifically Made Applicable to State and Local Governments

107.22 As noted in Exhibit 1-2, AICPA Industry Audit and Accounting Guides and AICPA Statements of

Position (SOPs) specifically made applicable to state and local governments and cleared by the GASB are

included in the level “b” of the hierarchy of GAAP. Principal among these is SLG. Accounting guidance

provided in SLG is discussed throughout this Guide. In addition to SLG, the GASB has also made applicable

these guides and SOPs:

• Audit and Accounting Guide, Audits of Property and Liability Insurance Companies. (For public entity risk

pools; see section 1704.)



• Auditing and Accounting Guide, Health Care Organizations. (See section 1708.)

• SOP 98-2, Accounting for Costs of Activities of Not-for-Profit and State and Local Governmental Entities

That Include Fund Raising. (See section 1709.)

Conflicts between GAAP and Legal Accounting Requirements

107.23 GAAP, as it is applied to governmental entities, gives recognition to the many and varied finance-

related legal and contractual requirements inherent in the governmental environment. For instance, the fund

structure, bases of accounting, and presentation of budgetary comparisons reflect consideration of legal

requirements. Also, GAAP requires disclosure of material violations of legal or contractual provisions.

Nevertheless, as stated in GASB Cod. sec. 1200.101, adherence to GAAP should assure that governmental

financial statements are uniform with respect to fund types and measurement and classification criteria,

regardless of differing legal requirements and customs.

107.24 However, there may be conflicts between GAAP and legal requirements. For example, statutes or other

legal or contractual provisions may require establishment of specific funds to account for particular transactions

where GAAP would require use of another fund, or they may require use of the cash basis of accounting for

situations where GAAP would require the accrual basis. GASB Cod. sec. 1200.108 observes that such

differences often result because “constitutional, charter, or other legal provisions governing fiscal operations

are antiquated and difficult to change.”

107.25 The GASB has authority to establish GAAP but it does not have authority over laws and contractual

provisions. Thus, GASB Cod. sec. 1200.110 states that when GAAP and legal or contractual provisions related

to accounting records conflict, accounting systems should be maintained on the legally required basis but

should include enough supplemental information and records so that GAAP financial statements can be

prepared.

107.26 In some cases, GAAP itself may require that a financial statement be presented on a legally required

basis that differs from GAAP; however, presentation of a reconciliation to the GAAP basis would also be

required. For example, many governments have budgetary bases of accounting that are different from the

modified accrual basis of accounting required in the governmental fund financial statements. As discussed

beginning in paragraph 1403.2, when this is the case, GAAP requires governments to include a reconciliation

showing the differences from the GAAP basis in their required budgetary comparisons.

107.27 Finally, if the GAAP financial statements do not demonstrate compliance with finance-related legal and

contractual provisions, the financial report should include additional schedules and explanations to

demonstrate necessary compliance. (See paragraph 1603.18.)




END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



108 Overview of the Governmental Financial Reporting Model

108 Overview of the Governmental Financial Reporting Model

108.1 This section is intended to provide an overview of the governmental financial reporting model

established by GASBS No. 34, as amended, including its format, objectives, scope, and required reporting.

Minimum Reporting Requirements

108.2 GASBS No. 34, paragraph 7, requires general purpose governments to present the following basic

financial statements and RSI in order for the financial statements to be in accordance with GAAP:

• Management's discussion and analysis (MD&A).

• Government-wide financial statements.

• Fund financial statements.

• Notes to the financial statements.

• Required supplementary information (RSI), including budgetary comparison schedules, infrastructure

condition data, and other data required by previous GASB pronouncements, if applicable.

108.3 The MD&A and RSI, though not part of the basic financial statements, are required for general purpose

governments. Exhibit 1-4 illustrates this information graphically. Each of these components of the reporting

model is discussed in the summary in Chapter 10 of this Guide.



108.4 Question 7.3.3 of the GASB Comprehensive Implementation Guide—2012-2013 indicates that the

exclusion of any piece of the information presented in Exhibit 1-4 results in an incomplete presentation of the

external reporting requirements for a general purpose government. See the discussion on issuing OCBOA

financial statements in section 110. Special-purpose governments, however, are allowed to omit the

government-wide financial statements or combine the government-wide and fund financial statements in

certain circumstances. (See the discussion beginning at paragraph 1701.7.)

Exhibit 1-4

Minimum Financial Reporting Requirements

____________________

GASBS No. 63—Reporting Net Position

108.5 GASBS No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources,

and Net Position, issued in June 2011, adds the financial statement elements of deferred outflows of resources

and deferred inflows of resources to the financial statements of all fund types and activities. Those elements

were introduced in GASBS No. 4, Elements of Financial Statements, in June 2007. GASBS No. 63 requires

proprietary and fiduciary funds and governmental- and business-type activities to present a statement of net

position instead of a statement of net assets. GASBS No. 63 does not change fund balance reporting for

governmental funds but does require deferred outflows of resources and deferred inflows of resources to be

reported in those funds. (Until a government applies GASBS No. 65, Items Previously Reported as Assets and

Liabilities—effective for years beginning after December 15, 2012—it cannot report any item as governmental

fund deferred outflows or deferred inflows. Consequently, implementing GASBS No. 63 will not impact

governmental fund balance sheets unless the government early implements GASBS No. 65.) GASBS No. 63 is

effective for financial statements for periods beginning after December 15, 2011. (GASBS No. 63 is

incorporated throughout this Guide but also is summarized in section 1012.)



Management's Discussion and Analysis

108.6 MD&A is a narrative report prepared in an easy-to-read format by the government's financial manager. It

should:

• Introduce the basic financial statements, and

• Provide an analytical overview of the government's financial activities for the year based on the financial

manager's knowledge of the transactions, events, and conditions reflected in the financial report and the

fiscal policies that control the government's operations. Use of charts, tables, and graphs is encouraged.

108.7 Scope

The narrative should be based on information that management has as of the date of the auditor's report. The

focus of the MD&A should be on the primary government, and the analysis should distinguish between

information that pertains to the primary government and that of its component units.

108.8 RSI

The MD&A must be presented as RSI before the basic financial statements. This helps assure that the

information is presented and that auditors are associated with it at a reasonable cost. Under auditing

standards, auditors are required to apply certain limited procedures to RSI even though it is not part of the

basic financial statements. Explanatory paragraphs are required in the auditor's report if the information is

presented but departs materially from the prescribed guidelines or if the information is omitted. Most RSI

follows the notes to the financial statements, but an exception was made for the MD&A. Some believe that

users may have bogged down in reading the financial statements and would not have made it to the more

reader-friendly MD&A if it followed the financial statements. Its placement should improve its chances of being

read.

108.9 Required Components

MD&A must be confined to the following eight components:

• A brief discussion of the relationships of the basic financial statements to each other and the major

differences in the information provided in each.

• A comparison in condensed form of information presented in the government-wide financial statements

for the current and prior year.



• An analysis of the government's overall financial position and results of operations to help users

determine whether financial position has improved or deteriorated due to current-year activities.

• An analysis of significant changes that occurred in individual funds and any limitations that might affect

the availability of fund resources in the future.

• An analysis of significant budget variances (original versus final budget and final budget versus actual

results) for the general fund or its equivalent, including reasons for those variances that may affect future

services or liquidity.

• A summary of significant capital asset and long-term debt activity with a discussion of commitments and

limitations that may affect future financing of planned facilities or services.

• A discussion of infrastructure assets (if the government has elected not to depreciate such assets).

• A description of facts, conditions, or decisions of which management was aware on or before the audit

report date that is expected to have a significant effect on financial position or results of operations after

the reporting date.

108.10 Relationship of MD&A to Transmittal Letter

GASBS No. 34 encourages governments that present a transmittal letter in a CAFR not to duplicate

information contained in MD&A. The transmittal letter may focus more on information that is more subjective

(such as prospective information) or elaborate on information in the MD&A.

108.11 See Chapter 15 for a detailed discussion of MD&A. See section 1602 for a discussion of letters of

transmittal.

Government-wide Financial Statements

108.12 The first group of basic financial statements required by GASBS No. 34, as amended, is the

government-wide financial statements. These statements are comprised of a statement of net position and a

statement of activities. The government-wide financial statements must be prepared using the economic

resources measurement focus and the accrual basis of accounting. The statements should use a columnar

presentation that separately reports (a) governmental activities and business-type activities for the primary



government, and (b) component units. A total column must be presented for the primary government. A total

column may be presented for the entity as a whole but is not required.

108.13 Key elements of the government-wide financial statements include:

• The statement of net position and statement of activities focus on the government “taken as a whole”

rather than on fund types. (In addition to the net position format, the traditional balance sheet format is

also permissible.)

• The statement of net position reports all capital assets, including general capital and general

infrastructure assets, and the statement of activities reports depreciation expense on those assets.

However, governments can avoid depreciating infrastructure by (a) using an asset management system

with prescribed characteristics and (b) documenting that the assets are being preserved at an established

and disclosed condition level. (Governments using this exception—called the “modified approach”—must

make certain infrastructure disclosures as RSI. See section 712. )

• The statement of net position reports all long-term liabilities, including general long-term debt. As noted

above, separate columns distinguish governmental long-term liabilities from liabilities associated with

business-type activities.

• The statement of net position reports all deferred outflows of resources and deferred inflows of

resources, including those not reported in governmental fund financial statements. Deferred outflows and

deferred inflows related to governmental activities are distinguished from those related to business-type

activities by reporting in separate columns.

• Net position is classified in the three categories: (a) net investment in capital assets; (b) restricted; and

(c) unrestricted. Capital contributions to both governmental and business-type activities are reported as

revenues.

• The statement of activities measures “net (expense) revenue” for each of the government's functions and

reports revenues by program, with general revenues (such as taxes) reported separately. The level of

detail of the government-wide statements must be at a minimum by function for activities accounted for in

governmental funds, the same minimum required in the fund financial statements. Activities accounted for

in enterprise funds should be presented at a minimum by different identifiable activities in the statement of

activities.



• Special and extraordinary items must be segregated from other revenues and expenses. (Extraordinary

items must be both unusual and infrequent. Special items are significant transactions within

management's control that are unusual or infrequent.)

• Fiduciary activities are excluded from the government-wide statements because those resources are not

available to finance the government's programs.

• Most interfund balances and activities must be reclassified and eliminated in the total primary

government column.

108.14 Because governmental funds are reported in the fund financial statements on the modified accrual

basis of accounting, many governments only record the accruals as adjusting entries when preparing the

government-wide financial statements. (See discussion in section 1202, and the illustration at Appendix 12A.)

Those adjustments change the results of operations for governmental activities and could significantly

decrease net position when including such items as compensated absences and other long-term operating

liabilities as expenses. However, adjustments for currently deferred revenues and capital assets will result in

an increase in net position.

108.15 See Chapter 12 for a detailed discussion of government-wide financial statements.

Fund Financial Statements

108.16 Funds used by governments fall into three broad categories—governmental, proprietary, and fiduciary.

Exhibit 1-5 lists the fund types used under GASBS No. 34, as amended.

Exhibit 1-5

Fund Financial Statement Information

Fund Categories Governmental Proprietary Fiduciary

Fund Types General Fund

Special Revenue Funds

Capital Projects Funds

Debt Service Funds

Enterprise Funds

Internal Service Funds

Pension (and other

employee benefit) Trust

Funds

Investment Trust Funds

Private-purpose Trust

Funds



Permanent Funds Agency Funds

Measurement

Focus/Basis of

Accounting

Current Financial

Resources/Modified Accrual

Economic

Resources/Full Accrual

Economic Resources/Full

Accrual

Required

Financial

Statements

Balance Sheet

Statement of Revenues,

Expenditures, and Changes

in Fund

Balances

Statement of Net

Position

Statement of Revenues,

Expenses, and Changes in

Fund Net Position

Statement of Cash

Flows

Statement of Fiduciary Net

Position

Statement of Changes in

Fiduciary Net Position

____________________

108.17 Separate fund financial statements are presented for each fund category with the reporting emphasis

on individual major funds. Exhibit 1-5 lists the required financial statements, measurement focus, and basis of

accounting for each fund category. Key elements of the fund financial statements include:

• Separate columns are required for the general fund and other major governmental and enterprise funds.

Major funds are those whose revenues, expenditures/expenses, assets and deferred outflows of

resources, or liabilities and deferred inflows of resources are at least 10 percent of corresponding totals for

all governmental or all enterprise funds and for which the same element is at least 5 percent of the

combined totals of the governmental and enterprise funds. In addition, any other fund that government

officials believe has importance to financial statement users may be reported as a major fund. Nonmajor

funds are reported in the aggregate in a separate column. Major fund reporting does not apply to internal

service funds or fiduciary funds. Proprietary fund statements should report internal service funds in the

aggregate (by fund type) in a separate column. Fiduciary fund statements continue to report by fund type.

• A summary reconciliation to the government-wide financial statements, is required to be presented at the

bottom of the governmental fund financial statements or in an accompanying schedule. This is necessary

because different measurement focuses are used in the statements. Common reconciling items include

capital assets and long-term liabilities.

• Governmental fund balances are classified as nonspendable, restricted, committed, assigned, and

unassigned (see section 1103) and proprietary fund net position as net investment in capital assets;

restricted; and unrestricted.



• Capital contributions to proprietary funds are reported as revenues.

• Cash flow reporting for proprietary funds must be based on the direct method.

108.18 See Chapter 11 for a detailed discussion of fund financial statements.

Notes to the Financial Statements

108.19 Notes to the financial statements focus on the primary government (that is, the governmental activities,

business-type activities, major funds, and nonmajor funds in the aggregate). Notes to the financial statements

communicate information essential for fair presentation of the basic financial statements that is not displayed

on the face of the financial statements. As in all financial reporting models, the notes constitute an integral part

of the basic financial statements. See Chapter 13 for a detailed discussion.

Required Supplementary Information (RSI)

108.20 RSI, other than MD&A, must be presented immediately after the notes to the financial statements. In

addition to MD&A, RSI includes the following:

• Supplementary information required under GASBS Nos. 10, 25, 27, 43, 45, 67, and 68.

• Budgetary comparison schedules for the general fund and each major special revenue fund with a legally

adopted budget (unless the government elects to include the required information in a budgetary

comparison statement as part of the basic financial statements).

• Schedules and accompanying disclosures of certain infrastructure assets (only if a government elects not

to depreciate these assets by using the modified approach).

The original and final budgets should be reported in the budgetary comparison schedule/statement. Though

encouraged, a column with variance calculations between actual and budget is not required.

108.21 See section 1008 and Chapter 14 for a detailed discussion of budgetary reporting and other RSI.

Glossary

108.22 A glossary of terms is provided at Appendix 10C.




END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



109 Financial Statement Materiality and the Governmental Financial Reporting Model

109 Financial Statement Materiality and the Governmental

Financial Reporting Model

Determining Materiality—THE BASICS

• The AICPA, not GASB, is responsible for establishing the methods of determining materiality.

• SLG requires that separate materiality determinations be made for each opinion unit, not for the entity as a

whole. (Paragraph 109.5 lists these opinion units.)

Background

109.1 The methodology for determining materiality for GASBS No. 34 financial statements has been a

controversial question since the GASB completed the current financial reporting model. The GASB

Comprehensive Implementation Guide—2012-2013 addresses certain materiality issues, as discussed

beginning at paragraph 109.2. More importantly, materiality is also addressed in the SLG. SLG provides that

the basic materiality determination for planning, performing, evaluating, and reporting under the GASB 34

model is based on an opinion unit. Opinion units are discussed beginning at paragraph 109.5.

GASB Implementation Guidance

109.2 An extended period of long and often difficult discussions between the GASB and its staff members and

the AICPA's Audit Issues Task Force (AITF) resulted in the GASB including six questions in the GASB

Comprehensive Implementation Guide—2012-2013 that address materiality considerations when preparing

financial statements in conformity with GASBS No. 34. Questions 7.4.1 through 7.4.3 address the basic

financial statements, including reconciliations and major funds. Questions 7.4.4 through 7.4.6 address

component units. While this guidance may not be that critical for the financial statement preparer, it serves as a

basis for the auditor to determine the necessary materiality levels required for opining on the financial



statements. Paragraphs 4.28 and 4.29 of SLG contain the guidance provided by GASB on materiality

determinations.

109.3 Question 7.4.1 of the GASB Comprehensive Implementation Guide—2012-2013 indicates that

governmental activities, business-type activities, and major fund columns (both governmental and enterprise)

be used for determining quantitative materiality. It also notes that information about the remaining fund

information—nonmajor funds, internal service funds, and fiduciary funds—may or may not be quantitatively

material. The question suggests several ways the remaining information could be evaluated. However,

qualitative materiality aspects should be considered in all materiality decisions. Question 7.4.2 notes that

materiality of the information in the reconciliations should be considered in conjunction with the related financial

statements. Question 7.4.3 indicates that once governmental and enterprise funds are presented as major in

the fund financial statements, they are all treated the same regardless of whether their major determination

was due to quantitative or qualitative reasons. (See section 1101.)

109.4 Questions 7.4.4 and 7.4.5 point out the differences between major funds and major component units and

indicate that materiality should be based on an evaluation of both the component unit's significance in relation

to the total of all discretely presented component units and the nature and significance of the unit's relationship

to the primary government. (GASBS No. 61, The Financial Reporting Entity: Omnibus, modifies the criteria for

defining “major” discretely presented component units and for assessing when note disclosures about

component units are required. The significance of a component unit in relation to the total of all component

units should not be considered in evaluating materiality after GASBS No. 61 becomes effective. GASBS No. 61

is effective for periods beginning after June 15, 2012. See section 1009.) Question 7.4.6 notes that

professional judgment should be applied when considering materiality issues for component unit information

when there are no major component units. That judgment includes considering relevant qualitative factions and

the relationship of the nonmajor component unit information to other appropriate information in the financial

statements.

109.5 Opinion Units

Paragraph 4.31 and Exhibit 4-1 of SLG require that separate materiality determinations be made on each of

the following opinion units, if applicable:

• Governmental activities.

• Business-type activities.

• Each major governmental fund.

• Each major enterprise fund.



• Aggregate discretely presented component units.

• Aggregate remaining fund information (includes nonmajor governmental and enterprise funds, internal

service fund type, and fiduciary fund types).

Each major fund is a separate opinion unit regardless of whether the fund is reported as “major” based on the

quantitative calculation or based on management discretion. (See paragraph 1101.8.) The auditor should

consider the information in the required reconciliations from the fund financial statements to the government-

wide financial statements as it relates to the presentation of the governmental activities and the business-type

activities opinion units.

109.6 The two aggregate opinion units (discretely presented component units and remaining fund information)

can be combined into one single opinion unit when either of the two aggregate opinion units is quantitatively

and qualitatively immaterial to the primary government. The resulting combined opinion unit is called the

aggregate discretely presented component unit and remaining fund information. No further combining or

aggregations of opinion units is allowed, even though Question 7.4.1 of the GASB Comprehensive

Implementation Guide—2012-2013 suggests that financial statement preparers further disaggregate the

remaining fund information for materiality purposes. (However, such information may affect the nature, timing,

and extent of audit procedures on that opinion unit.) As a result, most general purpose governments will have

at least five separate opinion units—one for each of the first four bullets in paragraph 109.5 and one combined

aggregate opinion unit.

109.7 A separate materiality determination must be made for each of the opinion units listed in paragraph

109.5 if the corresponding financial information is presented in the basic financial statements. The qualitative

or quantitative factors from one opinion unit do not affect the other opinion units. The auditor's report on the

basic financial statements will include one opinion on each opinion unit.

PPC Guidance on Materiality

109.8 PPC's Guide to Audits of Local Governments provides detailed guidance on determining materiality for

opinion units and preparing audit reports on governmental financial statements.


END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



110 OCBOA Financial Statements or Partial Implementation of the New Reporting Model

110 OCBOA Financial Statements or Partial Implementation of

the New Reporting Model

110.1 Questions have arisen as to the effect on the auditor's report if a governmental unit presents its financial

statements under the pre-GASB 34 model calling it an other comprehensive basis of accounting (OCBOA).

Other questions have arisen as to the effect of only partially implementing GASBS No. 34, such as presenting:

• only government-wide financial statements,

• only fund financial statements,

• cash or modified cash basis statements not in the GASBS No. 34 format, and

• basic financial statements, excluding required infrastructure assets.

110.2 Neither a financial statement presentation under the pre-GASB 34 model nor a partial GASBS No. 34

implementation is an other comprehensive basis of accounting. Those types of presentations do not meet the

criteria in GAAS for OCBOAs.

110.3 If financial statements that must be presented in accordance with GASBS No. 34 are presented under

the pre-GASB 34 model or are presented as only a partial implementation of GASBS No. 34, auditors should

modify their opinions based on the magnitude and pervasiveness of the omitted information. Paragraph 14.10

of SLG indicates that omitting required government-wide or fund financial statements would result in an

adverse opinion on the financial statements taken as a whole. Report modifications are discussed in PPC's

Guide to Audits of Local Governments.




END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Government



111 Auditor Independence in Financial Reporting

111 Auditor Independence in Financial Reporting

111.1 Governments should realize that there are certain limits to how much assistance an external auditor can

provide to the client while maintaining independence. For example, many audits of governments are performed

under Government Auditing Standards (the Yellow Book) issued by the U.S. Government Accountability Office

(GAO). Auditors performing Yellow Book audits must comply with the independence standards in the Yellow

Book.

111.2 The independence standards in the Yellow Book are more restrictive on some issues than the

independence standards of the AICPA.

• The GAO auditing standards recognize the AICPA standards as being necessary and appropriate to

financial statement audits but insufficient for the broader scope of governmental auditing. Thus, the GAO

auditing standards incorporate the AICPA auditing standards and add additional auditing standards that

are unique to public sector auditing.

• The 2011 Yellow Book enumerates several specific nonaudit services that always impair independence

(see paragraph 111.4) and that auditors are prohibited from providing to audited entities.

• If a nonaudit service is not specifically prohibited, the auditor is required to assess its impact on

independence using the conceptual framework.

Yellow Book Independence Standards

111.3 While the Yellow Book addresses a wide range of auditor independence issues, one of the most

significant rules concerns preventing auditors from performing certain nonaudit services, commonly referred to

as consulting services, and also providing audit services to the same client. Although the Yellow Book specifies

certain nonaudit services that would impair auditor independence, it acknowledges that it would be impossible



to define every situation. Therefore, it uses a conceptual framework approach for determining that the auditor

maintains independence in fact and appearance. The Yellow Book conceptual framework for independence

closely aligns the Yellow Book and the AICPA independence standards. If a nonaudit service is not expressly

prohibited, the auditor should apply the conceptual framework to decide whether a potential impairment exists.

This framework requires the auditor to identify threats to auditor independence and then assess the

significance of the threats.

111.4 The Yellow Book identifies specific prohibited nonaudit services that always impair independence and

that auditors are prohibited from providing to audited entities. If a nonaudit service is not specifically prohibited,

the auditor should assess its impact on independence using the conceptual framework. The auditor may be

able to provide certain services relating to preparing accounting records and financial statements if the

conditions specified in Paragraph 3.46 of the Yellow Book are met. In addition, Paragraph 3.40 of the Yellow

Book explains that activities such as preparing financial statements, converting cash basis financial statements

to accrual basis, and preparing reconciliations are nonaudit services that are to be evaluated using the

conceptual framework.


END OF DOCUMENT -




Documents

100 Introduction - Reutersstatic.store.tax.thomsonreuters.com/static/samplePages/Sample...Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Government