The Financial Reporting Model

presented at the 2012 School of Governmental Finance Beginner

Boot Camp

Jacqueline L. Reck, PhD, CPAInterim Associate Dean College of Business

November 13, 2012

Plan of Action

Content of a government annual report

Look at illustrations from a complete annual report

Go through the different financial statements

Questions during or at the end of the presentation

GASB – Annual Report (CAFR) Introductory section Financial section

Auditor’s report MD&A Basic financial statements and related notes Required supplementary information Supplementary information (such as combining

statements) Statistical section

MD&A Required supplementary material (not boilerplate) GASB specifically defines what must be included

Discussion of basic financial statements Condensed financial information comparing current

and prior year Analysis of overall financial position and results of

operations Analysis of balances and transactions Description of significant capital asset and debt

activity Description of currently known facts, decisions or

conditions that affect position or operations

Compare Financial Reports Look at the basic financial statements from KForce

prepared under FASB Look at the basic financial statements from the City of

Jacksonville What are some immediate differences that you see?

Required Basic Financial Statements Governmental Fund Statements

Balance Sheet Statement of Revenues, Expenditures and Changes

in Fund Balance

Note: a major fund is a general fund, and any governmental fund or enterprise fund with 10% or more of total assets/liabilities/revenues/expenses (expenditures) of all governmental (enterprise) funds and 5% or more of the corresponding element when governmental and enterprise funds are combined.

Comparing Governmental Fund Statements to KForce Take time to compare the City of Jacksonville Balance

Sheet-Governmental Funds to the Kforce Balance Sheet

Identify differences

Balance Sheet – Fund Balances Reporting model format Assets(current) = Liabilities(current) + Fund Balances

(2 categories)

Fund Balance Categories Nonspendable - not expected to be converted to

cash or cannot be converted Spendable (4 types)

Balance Sheet – Fund Balances Spendable

Restricted - externally imposed or imposed by law or enabling legislation

Committed - use of funds is constrained by formal action of highest level with decision-making authority

Assigned - government intent to use for a specific purpose

Unassigned - everything else, note only the General Fund can have a positive unassigned fund balance. Since a negative restricted, committed or assigned balance is not allowed, other funds may report a negative unassigned balance.

Comparing Operating Statements Compare the City of Jacksonville Statement of

Revenue, Expenditures and Changes in Fund Balance-Governmental Funds to the Kforce Income Statement

Identify differences

Statement of Revenues, Expenditures and Changes in Fund Balance

Reporting model formatRevenue- Expenditures= Excess of Revenues Over (Under) Expenditures+ Other Financing Sources (Uses) = Excess of Revenues & Other Sources Over (Under) Expenditures & Other Uses+ Special Items/Extraordinary Items/Capital Contributions+ Change in Fund Balances+ Beginning Fund Balances= Ending Fund Balances

Statement of Revenues, Expenditures and Changes in Fund Balance

Revenues are reported by source Expenditures are reported by function/program Extraordinary items involve transactions that are both

unusual and infrequent in nature (same as for-profit definition)

Special items are either unusual or infrequent in nature and under management control

Required Basic Financial Statements Proprietary Fund Statements

Statement of Net Position Statement of Revenues, Expenses and Changes in

Fund Net Position Statement of Cash Flows

Examples are provided for the City of Jacksonville

Statement of Revenues, Expenses and Changes in Net Position

GASB requires division into operating and nonoperating sections Operating revenue/expenses are to be tied to the

fund’s main purpose Management call on some items, such as grants Used in statement of cash flow

Statement of Cash Flows Direct approach is required by GASB Instead of three primary components of cash flow there

are four Operating Non-capital financing Capital and related financing Investing

Statement of Cash Flows Operating activities - effect of transactions used to

determine operating income Cash from sale of goods and services Cash from quasi-external operating transactions All other cash transactions that don’t fit into another

component area Cash payments are the obverse of the above

Statement of Cash Flows Direct method categories used for operating

activities cash receipts from customers cash receipts from quasi-external transactions other operating cash receipts cash to employees for services cash payments to other suppliers of goods and

services cash payments for quasi-external transactions other operating cash payments

Statement of Cash Flows Non-capital financing activities

Borrowing money to acquire, construct or improve non-capital assets

Repaying principal and interest related to non-capital borrowing

Look to transactions affecting the nonoperating section of the statement of revenues, expenses and changes in net assets

Statement of Cash Flows Examples of non-capital financing

cash received or paid relative to non-capital grants or subsidies

cash received from or paid to other funds, such as transfers

cash received from taxes proceeds and repayments related to non-capital

debt issues and borrowings payment of interest on non-capital debt

Statement of Cash Flows Capital and related financing activities

Acquiring and disposing of capital assets Any borrowing and repayments related to capital

assets (including interest) Capital financing activities are similar to non-capital,

but involve capital assets

NOTE: debt that is not clearly related to capital construction, acquisition or improvement should be considered non-capital debt

Statement of Cash Flows Investing activities

Making and collecting on non-program loans Acquiring and disposing of debt and equity

investments (including interest and dividends) Includes deposits or withdrawals from investment

pools that an entity is not using as demand accounts

Statement of Cash Flows Reconciliation of net cash flow from operating activities

to cash is required Noncash transactions should be shown in a schedule

on the face of the financial statements or in the notes

Required Basic Financial Statements Fiduciary Funds

Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position Examples for Jacksonville are included Each trust fund type must have its own column

(agency, special-purpose, investment, pension) Only funds held for those external to the government

are reported on the fiduciary financial statements

Required Basic Financial Statements Government-wide Financial Statements – include ONLY

governmental and proprietary information (NOT fiduciary) Statement of Net Position (reporting model same as

in corporate accounting) Statement of Activities (backward model)

Take some time to look at the Jacksonville statements – how are they different from the fund statements?

Statement of Net Position Primary government columns include

Governmental activities Includes governmental fund activity and

generally internal service fund activity Transactions between governmental funds are

not reported (eliminated) Business-type activities – enterprise fund activity Total column – note internal receivables and

payables between the two columns are netted Component unit columns as appropriate

Statement of Net Position Reporting model format

Assets – Liabilities = Net Position Net Position is reported in 3 categories

Net Investment in Capital Assets – net fixed assets less any related debt

Restricted – limits the availability of the assets Restriction caused by external party or law Separate into expendable and nonexpendable

Unrestricted – available net position

Statement of Net Position (cont’d) Investments

Reported at fair value Realized and unrealized gains/losses netted Extensive note disclosures

Methods and assumptions for fair valuing if other than quoted market

Investment type Risk disclosures – credit, custodial,

concentration, interest rate

Statement of Net Position (cont’d) Capital assets

Reconciliation required in the notes Intangible assets – considered capital assets by

GASB

Statement of Net Position (cont’d) Capital assets (cont’d)

Impairment – Events that may lead to impairment Decline in the market value of the asset Significant change in the way the asset is used Significant adverse change in the legal or

business climate which could affect asset value Costs significantly in excess of the amount

originally expected to acquire or construct an asset

Statement of Net Position (cont’d) Capital assets (cont’d)

Impairment - Apply recoverability test to determine if impairment has actually occurred Estimate future net cash flows and the disposal

amount If the estimate is less than the carrying value an

impairment has occurred

Statement of Net Position (cont’d) Compensated absences (vacation and sick leave)

Becoming a huge problem for governments Accrue as employees earn the rights to the vacation

benefits Right to receive compensation is related to services

already rendered Probable the employer will compensate with time or

other means Due not accrue if benefit can lapse

Accrue sick leave only if there is a termination payment

Statement of Activities Reporting model format

Expenses – Program Revenues = Net Expenses+ General Revenues+ Transfers/Special Items Extraordinary Items= Change in Net Position+ Beginning= Ending Net Position

Statement of Activities Both governmental and business-type activities are

included Component units are not included in primary

government totals Expenses are reported by function/program

Statement of Activities Program revenues are to be identified in 3 categories

Charges for services (includes licenses, permits, fines and forfeits)

Operating grants and contributions Capital grants and contributions

General revenues are All tax revenues Other revenues not specifically identified with a

function/program Should be identified by source

Reconciliations GASB requires reconciliation of the fund financial

statements to the government-wide financial statements Balance Sheet to Statement of Net Position Statement of Revenues, Expenditures and Changes

in Fund Balance to Statement of Activities See examples from Jacksonville

Required Supplementary Material Budget and Actual Statement/Schedule (similar to a

variance report) Uses Statement of Revenues, Expenditures and

Changes in Fund Balance format Required to be prepared on the budgetary basis Requires original and final budget Requires actual revenues and

expenditures/encumbrances

Statistical Section Financial trends information – schedules are provided at

the fund and government-wide levels Revenue capacity information – schedules should focus on

the government’s most significant own source revenues Debt capacity information – schedules are provided to

assist in assessing existing debt burden and ability to issue new debt

Demographic and economic information – assists in assessing the socioeconomic situation

Operating information – provides context for government operations

Resources GASB Codification, issued annually GASB Comprehensive Implementation Guide, issued

annually AICPA Audit and Accounting Guide – State and Local

Governments GFOA Blue Book

Conclusion We have scratched the surface on financial reporting Numerous note disclosures that are required Financial reporting is much more complex than the

reporting for entities under FASB

Questions!