UNDERSTANDING GOVERNMENTAL FINANCIAL STATEMENTS

UNDERSTANDING

GOVERNMENTAL

FINANCIAL STATEMENTS

Presented by:

Larry Weeks, CPA

Today’s Presenter:

Larry Weeks, CPA

Government vs Private Entity Reporting

A. Private Entity Reporting

• Profit motive

• Return on Investment (ROI)/Earnings per Share

• Budgeting is a management tool

B. Governmental Entity Reporting

• Service motive

• Stewardship of resources provided

• Budgeting is legislative control over operations

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Types of Financial Reporting

A. Internal

• Users are management and governing body

• Contents and nature of reports established internally

B. Special Purpose External

• Users vary – grantors, oversight agencies, regulators

• Contents and nature of reports established by party requiring reports

C. General Purpose External

• Users vary – citizens, legislative and oversight agencies, and creditors

• Content and nature of reports established by GAAP

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GAAP Hierarchy

GASB 55 establishes GAAP for all State and Local governmental

entities in the following order of priority:

1. GASB Original Statements and Interpretations

2. GASB Technical Bulletins, AICPA audit and accounting guides,

and AICPA Statements of Position

3. AICPA Practice Bulletins

4. GASB Implementation Guides

5. Other sources (unusual situations) – GASB concept statements,

FASB, etc.

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Basic Financial Statements

A. Minimum presentation level if reporting under GAAP

B. Content includes:

• Government-Wide Financial Statements

• Fund Financial Statements

• Notes to the Basic Financial Statements

• Required Supplementary Information (RSI)

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Government-Wide Financial Statements

A. Present operational accountability – responsibility to report the extent to

which they have met its operating objectives efficiently and effectively, using

all available resources, and can continue to do so for the foreseeable future.

B. All funds are reported within two distinct “activities” – governmental activities

and business-type activities (separate columns).

C. Prepared using economic resources measurement focus and accrual basis

of accounting.

D. Equity reported as “net position;” broken down into net investment in capital

asset, restricted, unrestricted.

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E. Governmental activities typically include financial data for all governmental

funds. Internal service fund(s) are typically incorporated into governmental

activities as well.

F. Business-type activities typically include financial data for all enterprise

funds.

G. Statements of Net Position and Activities report governmental activities

separate from business-type activities.

H. Fiduciary funds are excluded from government-wide reporting since

resources are not available to fund the government’s programs or activities.

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Observations on government-wide financial statements

✓ Financial position ratios (net position/expense or revenues) can be readily produced

for each type of activity or total government using total net position or just unrestricted

net position. Useful to analyze over a period to time to determine trends.

✓ Liquidity ratio (current assets/current liabilities) measures the government’s ability to

meet obligations as they become due

✓ Expense ratios (functional or activity expenses/population or utility accounts) can be

effectively measured against other similar governments

✓ Revenue ratios (program revenue/total revenue) can be effectively measured against

other similar governments

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Misconception on government-wide financial statements

✓ Government-wide financial statements are real financial statements and fund

financial statements only support the government-wide statements

✓ Deferred inflows of resources are the same as liabilities

✓ Significant pension/OPEB liabilities are indicators of pending financial crisis

✓ Program revenue includes all revenue sources dedicated to a specific purpose

or program

✓ Depreciation expense is a good measure of the amount needed to replace

aging capital assets

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Fund Financial Statements

A. Used to demonstrate fiscal accountability – responsibility to justify actions

during the current period were appropriate.

B. Separate set of financial statements required for:

• Governmental funds (primarily supported by taxes, grants)

• Proprietary funds (significantly supported from charges for services and fees)

• Fiduciary funds (resources held as trustee or agent)

C. Focus of fund financial statements is on “major funds” while all others

reported in one “other fund” column. Internal service and fiduciary funds

reported by fund-type.

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D. Governmental Funds

• Prepared on the current financial resources measurement focus and modified

accrual basis of accounting

• Two required statements: Balance Sheet and Statement of Revenues,

Expenditures and Changes in Fund Balances. Option to report budget to

actual comparison as part of basic governmental funds financial statements.

• Required reconciliation to government-wide statements

• Column for each major governmental fund, one column for all “nonmajor

governmental funds”, and total column for all governmental funds

• Equity reported as “fund balance”; broken down into 5 categories –

nonspendable, restricted, committed, assigned, and unassigned

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E. Proprietary Funds

• Prepared on the economic resources measurement focus and accrual

basis of accounting (same as government-wide statements)

• Three required statements:

• Balance Sheet

• Statement of Revenues, Expenses and Changes in Net Position

• Statement of Cash Flows

• Column for each major enterprise fund, one column for all “nonmajor

enterprise funds”, total column for all enterprise funds, and one column for

all internal service funds

• Equity reported as “net position”; broken down into net investment in

capital asset, restricted, unrestricted

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F. Fiduciary Funds

• Prepared on the economic resources measurement focus and accrual basis

of accounting (same as government-wide statements), with exception of

agency funds which have no measurement focus (assets = liabilities)

• Two required statements: Statement of Fiduciary Net Position and

Statement of Changes in Fiduciary Net Position

• Column for each fund type (private purpose trust funds, pension/OPEB trust

funds, investment trust funds, and agency funds)

• Equity reported as “Net Position Held in Trust”

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Observations:

✓ Fund balance ratios (unassigned fund balance/expenditures or revenues)

can be readily produced for each government fund. Unassigned and

assigned fund balance could be added together to assess controllable

funds. Useful to analyze over a period to time to determine trends. GFOA

recommends no less than two months of which measurement is selected

(16.7%).

✓ Liquidity ratio (current assets/current liabilities) measures the government’s

ability to meet obligations as they become due (more or less what fund

financial statements are measuring in the first place)

✓ Expenditure ratios (functional expenditures/total expenditures) can be

effectively measured of the priorities of the legislative body

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Misconceptions:

✓ Unrestricted net position is same as unassigned fund balance

✓ Users should only focus on the size of fund balance in assessing the

financial health of a governmental fund

✓ Assigned fund balance always represents the full amount of resources

earmarked by a government for a specific purpose or program

✓ Revenue on the fund statements is the same as revenue on the

government-wide statements

✓ Actual expenditures significantly less than the amount budgeted is always a

good thing

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Required Financial Statements

Summary of Required Financial Statements

• Government-wide statements (2)

• Governmental fund statements (2 or possibly 3)

• Enterprise fund statements (3)

• Fiduciary fund statements (2)

• Depending on the types of funds maintained by a governmental entity, the

required number of separate financial statements within the basic financial

statements could be 9 or 10, depending on placement of budgetary

comparison information

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Notes to the Basic Financial Statements

A. Notes to the basic financial statements present additional detail and

narrative to supplement or describe the amounts contained within the

financial statements as defined by GASB Statement 38 and other

Statements.

B. Required disclosures depend on nature of transactions reported as well as

materiality of the amounts, however general note disclosures should consist

of the following:

• Summary of significant accounting policies (SSAP)

• Additional detail or explanations concerning amounts presented in financial statement

• Narrative on items that do not meet the criteria for recognition in financial statement

(amounts cannot be sufficiently measured)

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C. Summary of significant accounting policies should be presented first

and contain the following:

• Description of the reporting entity

• Description of financial statements, including basis of presentation, basis of

accounting, and budgetary policies

• Description of statement of net position/balance sheet items:

✓ Disclosure of policies such as capital assets, modified approach, and applying

expenditures to net position/fund balance classifications

✓ Description of cash equivalents, deferred inflows/outflows, unusual accounting treatment

for material accounts or balances

• Description of revenues and expenses/expenditures:

✓ Program revenue, property tax revenue recognition, manner in which compensated

absences valued, and defining operating revenues and expenses

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D. Detailed note disclosures should be presented to enhance a user’s

understanding of amounts reported in the financial statements and

generally include:

• Expanded detail of aggregated amounts presented in financial statements

(reconciliations, receivables, payables, etc.)

• Assets – cash and investments, capital assets, etc.

• Deferred outflows of resources

• Liabilities – debt obligations, pension/OPEB plans, leases, etc.

• Deferred inflows of resources

• Net position and fund balance

• Interfund activity – transfers and advances

• Other – related party transactions, contingent liabilities, subsequent events, etc.

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Government’s policies that affect financial statement amounts should be

described in the note disclosures, including:

• Investment policy and definition of cash equivalents

• Capital assets – capitalization threshold, useful lives and estimated cost of certain

items

• Severance policies drive compensated absences liability calculation

• Order in which expenses/expenditures are satisfied within net position and fund

balance classification

• Budgetary policies obviously affects the manner of presentation (carryover or

lapsing of appropriation, legal level of control)

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Required Supplementary Information (RSI)

A. Required by GASB to place the basic financial statements in an

appropriate operational, economic, or historical context.

B. No assurance or opinion is provided on RSI by audit.

C. General RSI includes the following:

• Management’s Discussion and Analysis (presented before basic financial

statements)

• RSI presented after note disclosures:

✓ Budgetary comparisons for general and major special revenue funds, if not

included in basic financial statements

✓ Infrastructure condition and maintenance data using modified approach

✓ Pension/OPEB net liability and contributions schedules by plan

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Summary of Basic Financial Statements

Minimum level of external reporting is the basic financial statements per

GAAP and is summarized as follows:

• MDA (RSI)

• Government-wide financial statements

• Fund financial statements:

✓ Governmental funds

✓ Proprietary funds

✓ Fiduciary funds

• Complete note disclosures

• Other RSI:

✓ Budgetary comparison for general and major special revenue funds

✓ Infrastructure condition and maintenance using modified approach

✓ Pension/OPEB net liabilities and contributions schedules

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Comprehensive Annual Financial Report (CAFR)

While not required, CAFR presentation is encouraged by authoritative

Standards (NCGA Statement 1). Every CAFR includes, at a minimum, the

following sections:

1. Introductory section

2. Financial section

3. Statistical section

CAFR preparation is encouraged to provide introductory information on the

government which is more subjective than MD&A, more detail on individual

funds, and historical comparison of current financial and operational amounts

to prior years.

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1. Introductory Section:

• Transmittal letter serves as introduction to the government’s financial

statements and operations

• Other – list of principal officials and organizational chart

2. Financial Section:

• Basic financial statements, including RSI (Required Supplementary Information)

• Combining statements for nonmajor funds

• Individual fund financial statements and schedules (BVA [budget vs.

actual] comparisons for all governmental funds)

• Other – audit opinion (first item of section)

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3. Statistical Section:

• Provides current and historic data related to a) financial trends, b)

revenue capacity, c) debt capacity, d) demographic and economic

information, and e) operating information

• Specific reporting requirements of the Statistical Section

established by GASB Statement 44

• Trend information typically show for current period and prior nine

periods (10 years in total)

• Should include narrative explanations, sources, and assumptions

associated with information presented

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Questions?

Larry Weeks

CPA

Shareholder

937.399.2000

[email protected]

Thank you!

Larry Weeks

CPA

Shareholder

937.399.2000

[email protected]

Documents

UNDERSTANDING GOVERNMENTAL FINANCIAL STATEMENTS