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Financial Reporting: The Basic Financial Statements

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Title: Financial Reporting: The Basic Financial Statements


1
Financial ReportingThe Basic Financial
Statements Required Supplementary Information
  • Chapter 13

2
Learning Objectives
  • Identify the financial statements in a
    governments basic financial statements
  • Understand format and content of government-wide
    financial statements and fund financial
    statements
  • Understand the concept and content of RSI
  • Identify a governments major funds and how to
    prepare fund financial statements
  • Distinguish program revenues from general
    revenues
  • Understand unique reporting provisions of
    infrastructure capital assets
  • Understand required information components of
    MDA
  • Understand types of notes to financial statements
  • Understand reporting requirements of special
    purpose governments

3
Major Elements of Principle 13
  • Interim financial statements reports
  • Comprehensive Annual Financial Report (CAFR)
  • Minimum reporting requirements
  • MDA
  • Basic Financial Statements
  • Required Supplementary Information
  • Financial reporting entity
  • Nucleus of a financial reporting entity

4
Interim Financial Statements
  • Encouraged, but not required
  • Prepared to facilitate managements control of
    the government, legislative oversight, and
    occasionally external financial reporting

5
Comprehensive Annual Financial Report
  • Should be prepared and published
  • Covers primary government (including blended
    component units) and discretely presented
    component units
  • Includes
  • Introductory Section
  • Financial Section
  • Statistical Section

6
Financial Reporting Entity
  • Consists of
  • Primary Government
  • Organizations for which the primary government is
    financially responsible
  • Other organizations whose exclusion from the
    report would cause it to misleading or incomplete

7
Reporting Entitys Financial Statements
  • Government-Wide Financial Statements
  • Provides information about the reporting
    government as a whole
  • Distinguishes between primary government
    (composed of Governmental Activities
    Business-Type Activities) and discretely
    presented component units
  • Fund Financial Statements
  • Presents primary governments major funds
    individually and nonmajor fund in aggregate
  • Funds and component units that are fiduciary in
    nature reported only at this level

8
Nucleus of Financial Reporting Entity
  • Usually a primary government
  • Other entities can serve as nucleus of own
    reporting entity, even when related to a primary
    government
  • Financial reports built from the bottom up,
    applying all definition and display provisions to
    each level before rolling up to next level

9
Focus of this Chapter
  • Minimum requirements for financial reporting,
    which are the MDA, basic financial statements,
    and other RSI
  • Some governments may be required to present a
    CAFR topic of Chapter 15

10
What makes up the minimum?Three graphic
presentations X
  • Basic drawing from GASBS 34
  • New drawing from later GASB source
  • Smittys Adaptation of The New Reporting Model

11
Basic Financial Statements Overview
  • Government-Wide Financial Statements
  • Statement of Net Assets
  • Statement of Activities
  • Governmental Funds Financial Statements
  • Balance Sheet
  • Statement of Revenues, Expenditures, and Changes
    in Fund Balances (GAAP basis)
  • Statement of Revenues, Expenditures, and Changes
    in Fund Balances Budget and Actual

12
BFS Overview (continued)
  • Proprietary Funds Financial Statements
  • Statement of Net Assets (Balance Sheet)
  • Statement of Revenues, Expenses, and Changes in
    Net Assets
  • Statement of Cash Flows
  • Fiduciary Funds Financial Statements
  • Statement of Fiduciary Net Assets
  • Statement of Changes in Fiduciary Net Assets

13
Government-Wide Financial StatementsCommon
Features
  • Distinguish between primary government and
    discretely presented component units
  • Focus is on the primary government
  • Distinguish between primary governments
    Governmental Activities and Business-Type
    Activities
  • Present a total column for the primary government
  • Apply same accounting standards to Governmental
    Activities and Business-Type Activities
  • Exclude Fiduciary Funds and fiduciary component
    units

14
Governmental Activities
  • Financed primarily through
  • Taxes
  • Intergovernmental revenues
  • Other nonexchange revenues
  • Generally reported in Governmental Funds and,
    maybe, Internal Service Funds
  • Most general capital assets and general long-term
    liabilities reported here
  • Activities include general administration, public
    safety, education, streets roads, and health
    sanitation

15
Business-Type Activities
  • Financed in whole or in part by fees charged to
    external users for goods and services
  • Generally reported in Enterprise Funds, although
    ISFs can be here, too
  • Activities may include public utilities, mass
    transportation, landfills, airports, and some
    recreational facilities

16
Statement of Net Assets
  • Generally same format as used by Proprietary
    Funds
  • May use either balance sheet format or net asset
    format
  • May or may not be classified
  • Columns may include
  • Governmental Activities
  • Business-Type Activities
  • Primary Government Total Column (required if both
    GA and BTA present)
  • Discretely presented Component Units (one or more
    columns)
  • Reporting Entity Total Column is optional

17
Key Features of Statement
  • Assets liabilities presented in order of
    relative liquidity (unless classified)
  • Liabilities with average maturities of more than
    one year must be reported separate from current
    liabilities
  • Capital assets should be reported either
  • Single line item or distinguish between
    depreciable and nondepreciable assets
  • Major classes of assets

18
Key Features of Statement (continued)
  • General capital assets included in Governmental
    Activities column
  • Infrastructure capital assets reported using
    modified approach should be reported separately
  • General long-term liabilities reported in
    Governmental Activities column
  • Interfund payables and receivables between
    Governmental Funds have been eliminated same is
    true for Enterprise Fund receivables and payables

19
Key Features of Statement (continued)
  • Internal balances between Governmental Activities
    and Business-Type Activities are net receivable
    and payable amounts eliminated when preparing
    total column
  • Net Assets presented in three components
  • Invested in Capital Assets, Net of Related Debt
  • Restricted distinguish between major categories
    of restrictions
  • Unrestricted

20
Statement of Net Assets ExampleCity of Tulsa,
Oklahoma X
  • Minimum column presentation
  • Uses Net Asset format common
  • Has a classified format less common
  • Typical use of Internal Balances shown as
    negative asset for Governmental Activities and
    Total is zero, as it should be
  • Capital Assets reported on a single line
  • Primary Government / Component Unit receivables
    and payables not eliminated
  • Standard Net Asset classifications good detail
    on Restricted Net Assets

21
Statement of Activities
  • Intended to present
  • Cost of providing services by function
  • Related program revenues derived from each
    function
  • Net burden that each function places on taxpayers
    and other providers of general revenues
  • Sources from which the net cost of the
    governments activities are financed

22
Statement of Activities Presentation
  • Three sets of columns
  • Expenses
  • Program Revenues
  • Net (Expense) Revenue and Changes in Net Assets
    these mirror columns found on Statement of Net
    Assets
  • Upper portion of statement reports
  • Expenses (of a particular function)
  • Program Revenues (of the function)
  • Net (Expense) Revenue (of the function)

23
Statement of Activities Presentation(continued)
  • Each function or program shown on a separate line
    with separate sections for
  • Governmental Activities minimum level of detail
    derived from Statement of Revenues, Expenditures,
    and Changes in Fund Balance Current (Operating)
    Expenditures section
  • Business-Type Activities minimum level is by
    identifiable activity
  • Component Units usually reported on one line
    but may report by major component unit

24
Measurement Focus elements
  • MFBA
  • Measurement focus economic resources
  • Basis of Accounting accrual
  • Expenses not found on Governmental Fund operating
    statement show reported on Statement of
    Activities
  • Capital outlay expenditures replaced by
    depreciation expense
  • Debt service principal payments not reported on
    Statement of Activities
  • Interest expenditure become interest expense
    much broader measure
  • Compensated absences, claims and judgments,
    pension liabilities not shown as expenditures on
    fund statements become expenses on this statement

25
Reporting Expenses
  • Reporting direct expenses by function is the
    minimum requirement for Statement of Activities
  • May allocate indirect expenses among functions
    requires use of a separate column (rarely used)
  • Interest Expense generally reported as a separate
    line function but may be as a direct expense if
    certain requirements are met
  • General rules for reporting Depreciation Expense
  • Direct expense of function responsible for
    related asset
  • Infrastructure depreciation direct expense of
    function responsible for maintaining it
  • Depreciation on asset used by all functions need
    not be allocated

26
Program Revenues vs. General Revenues X
  • Program Revenues generally classified as
  • Charges for Services
  • Program-specific Operating Grants Contributions
  • Program-specific Capital Grants Contributions
  • May change columnar titles, if appropriate
  • All revenues that are not Program Revenues are
    General Revenues
  • General Revenues include
  • All taxes
  • Other revenues that arent Program Revenues

27
Statement of Net Assets ExampleCity of Tulsa,
Oklahoma X
  • Example uses standard format
  • Functions presented
  • Governmental Activities consistent with functions
    on Statement of Revenues, Expenditures, and
    Changes in Fund Balances
  • Business-Type Activities consistent with
    Enterprise Funds reported later in CAFR
  • Component Units reported on single line
  • Note that Transfers between Governmental
    Activities and Business-Type Activities cancel out

28
Infrastructure Capital Assets
  • Accounting and reporting first required by GASBS
    34
  • Governments given extra time to capture
    infrastructure asset data
  • Allowed to use estimated costs
  • Only required to capitalize major infrastructure
    assets acquired since 1981
  • Small governments not required to capture
    existing infrastructure asset information
  • Governments may use modified approach for
    infrastructure in lieu of depreciation

29
Fund Financial Statements
  • Major fund statements prepared for
  • Governmental Funds
  • Enterprise Funds
  • Fund type statements prepared for
  • Internal Service Funds
  • Fiduciary Funds

30
Identifying Major Funds
  • General Fund is always a major fund
  • Other major funds may change from year-to-year
  • Any Governmental Fund or Enterprise Fund may be a
    major fund if both these tests are passed
  • Total assets, liabilities, revenues, or
    expenditures/ expenses (excluding extraordinary
    items or special items) are at least 10 of the
    corresponding total for all funds of that
    category or type
  • The same element that met the 10 test above is
    at least 5 of the corresponding element total
    for all Governmental Funds and Enterprise Funds
    combined
  • Other funds not passing these tests can be
    reported as major at the option of the government

31
Steps for Major Fund Calculations X
  • List all Governmental Funds and Enterprise Funds
  • Gather required information for each fund
  • Total Assets
  • Total Liabilities
  • Total Revenues
  • Total Expenditures / Expenses, as appropriate
  • Divide each element by applicable total for 10
    and 5 tests
  • Major funds are ones where same element passes
    both tests

32
Major Fund Reporting
  • Governmental Funds
  • Separate column for
  • General Fund
  • Each major fund
  • Aggregate column for all nonmajor funds
  • Total column required
  • Proprietary Funds
  • Separate column for each major Enterprise Fund
  • Enterprise Funds Total column required
  • Single column for all ISFs
  • Proprietary Total column prohibited

33
Fund Type Reporting
  • Used for Fiduciary Funds
  • Separate column for each type of Fiduciary Fund
  • Pension Trust Funds
  • Investment Trust Funds
  • Private Purpose Trust Funds
  • Agency Funds (on Statement of Fiduciary Net
    Assets only)
  • Total column prohibited

34
Fund Reporting ExamplesCity of Tulsa
Governmental Funds
  • Balance Sheet
  • 6 columns one for each major fund, aggregate
    column, and Total column
  • Assets listed in order of liquidity
  • Liabilities listed in same general order
  • Fund Balances
  • Reserved amounts shown in sufficient detail to
    understand nature of reserve
  • Reporting designations unusual but allowed
  • Unreserved amounts shown by fund type for
    nonmajor funds

X
35
Fund Reporting ExamplesCity of Tulsa
Governmental Funds
  • Statement of Revenues, Expenditures, and
  • Changes in Fund Balance
  • Same columnar structure as Balance Sheet
  • Unusual detail in reporting of tax revenues
  • Expenditure detail normal except for reporting
    debt service on a single line
  • Detail in Other Financing Sources (Uses) follows
    standard examples

X
36
Fund Reporting ExamplesCity of Tulsa
Governmental Funds
  • Reconciliations
  • Differences between Governmental Funds statements
    and Government-Wide Financial Statements must be
    reconciled
  • Balance Sheet reconciliation
  • Total Fund Balance to Total Net Assets
  • Shown on face of statement
  • Operating statement reconciliation
  • Change in Fund Balances to Change in Net Assets
  • Shown on separate schedule

X
37
Fund Reporting ExamplesCity of Tulsa
Proprietary Funds
  • Statement of Net Assets
  • Both Enterprise Funds are major funds
  • Reporting 3 classes of Assets Current,
    Restricted, and Noncurrent unusual but
    acceptable
  • Liabilities reported in same 3 classes
  • Net Assets has standard classifications
  • Additional item reported for ISF reconciliation
    (more on that in next chapter)

X
38
Fund Reporting ExamplesCity of Tulsa
Proprietary Funds
  • Statement of Revenues, Expenses, and
  • Changes in Fund Net Assets
  • Same columnar structure as the Statement of Net
    Assets
  • Note revenues pledged as security for revenue
    bonds
  • Somewhat unusual to see ad-valorem taxes in an
    ISF
  • Same reconciliation item at bottom of the
    statement, but for a different amount

X
39
Fund Reporting ExamplesCity of Tulsa
Proprietary Funds
  • Statement of Cash Flows
  • Columnar structure from other statements
    continued
  • Standard four sections of statement used on first
    page
  • Reconciliation on second page is in standard
    format
  • As required by GASBS 9, noncash transactions
    shown on face of the statement

X
40
Fund Reporting ExamplesCity of Tulsa
Proprietary Funds
  • Reconciliations
  • Same reconciliations may be required for
    Proprietary Funds
  • Usually caused by elimination of ISFs
  • Since MFBA is the same for Government-Wide
    statements and Proprietary Fund statements,
    reconciliation usually appears at bottom of
    statement, as shown in City of Tulsa examples

41
Fund Reporting ExamplesCity of Tulsa
Fiduciary Funds
  • Statement of Fiduciary Net Assets
  • Detail on investments typical for Pension Fund
    presentations
  • Lack of detail for Agency Funds to be expected
  • Presentation could be improved if Total Assets
    and Total Liability amounts for Agency Funds were
    double ruled, since no Fund Balance can be
    reported
  • Format is an improvement over earlier years when
    total column was included

X
42
Fund Reporting ExamplesCity of Tulsa
Fiduciary Funds
  • Statement of Changes in Fiduciary Net Assets
  • Limited example since Tulsa has no Investment
    Trust Fund or Private Purpose Trust Fund not
    unusual for a government of this size
  • Elements reported are typical for a Pension Trust
    Fund, as shown in Chapter 12

X
43
Note Disclosures
  • Often the section of Basic Financial Statements
    that takes up the most number of pages
  • GASB has two lists of notes in Codification
  • Essential for fair presentation of the Basic
    Financial Statements
  • Additional note disclosures, if applicable
  • Governments may present information beyond what
    is in these two lists, but shouldnt present
    unnecessary or redundant information

44
Required Supplementary Information
  • Managements Discussion and Analysis (MDA)
  • New requirement under GASBS 34
  • Presented after auditors opinion but before
    financial statements (RSI traditionally placed
    after the notes to the financial statements)
  • Standard provides 8 elements which must be
    presented in MDA, if applicable governments
    may not present other items
  • Example included in book and others available in
    CAFRs

X
45
Other RSI
  • Budgetary comparison schedules not included in
    Basic Financial Statements
  • Certain 10-year historical trend data for defined
    benefit Public Employee Retirement Systems
  • Certain presentations required for public entity
    risk pools
  • Disclosures required by governments that use the
    modified approach in accounting reporting for
    infrastructure

46
Budgetary Comparison Information
  • GASBS 34 allows information to be reported in one
    of two places
  • Part of basic financial statements
  • As Other RSI
  • Budget-to-Actual information must be provided for
    General Fund and major Special Revenue Funds
  • Local ordinances frequently require information
    for other funds must be shown later in the
    report

47
Fund Reporting ExamplesCity of Tulsa
Budget-to Actual data
  • City of Tulsa has elected to place information in
    RSI
  • Required information
  • Original budget
  • Final approved budget
  • Actual on a budgetary basis
  • Most governments include a variance column
  • If budgetary basis is not GAAP, differences must
    be explained in
  • RSI Tulsa reports information on face of
    schedule
  • Notes (only if information is part of Basic
    Financial Statements

X
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