Overview of Financial Reporting For

Chapter 2

Overview of Financial Reporting for

State and Local Governments

Governmental Reporting Entity

Primary government is the governmental unit for which CAFRs

are prepared, e.g., a state or general purpose local government

like a city, county or township.

Characteristics of a primary government are that 1) the

governing body is separately elected, 2) it has a separate legal

identity, and 3) it is fiscally independent. Fiscal independence

means that the government has the authority to determine its own

budget, levy taxes and set rates, and issue bonds.

Component unit are separate organizations for which the elected

officials of the primary government are financially accountable,

e.g., arts organizations, public universities, or housing authorities.

Financial accountability may also be indicated by fiscal

dependency, e.g., if the unit is unable to set its own budget, levy

taxes and set rates, and issue bonds without the approval of the

primary government.

The most important characteristics identifying a component unit

are if the majority of its governing board is appointed by the

primary government or is composed of primary government

officials. Addition factors to consider are if either: 1) the primary

government can impose its will on the organization or 2) if the

organization provides specific financial benefits to the primary

government or can impose specific financial burdens on it.

CAFRs should provide an overview of the primary government,

yet allow users to distinguish between it and component units. As

a result, component unit information is usually shown as a

separate column(s) apart from the financial data of the primary

government (discrete presentation). In government-wide

statements, those units to be presented discretely are to be

reported to the right of the “totals” columns of the primary

government. These component units normally are

combined into one column.

Where the governing body of the component unit is essentially the

same as that of the primary government, then its data is included

with that of the primary government (blending). Blending is

appropriate only when the relationship between the primary

government and the component unit is so close that the two

governments, while separate, are substantively the same.

Regardless of the method of reporting component units, the notes

of the primary government should identify the majorcomponent

units and the criteria used to include them in the F/Ss.

Related organization are those organizations for which the

primary government are not financially accountably, i.e., it

appoints a voting majority of the governing board, but neither of

the other two criteria are met, i.e., cannot impose its will or

provide specific benefits/burdens to the primary government.

Related organizations don’t qualify as component units and so are

not reported in the basic financial statements of the primary

government. However, the names of related organizations and

the nature of relationships with them with should be disclosed in

the notes.

Overview of Comprehensive Annual Financial Report

The introductory section (Ill. 2-2) includes:

1)The letter of transmittal

2)Organizational chart

3)List of principal officials

The financial section (Ill 2-1) includes:

1)The auditor’s report

2)Management’s discussion and analysis (MD&A)

3)Basic financial statements

Government-wide financial statements

Statement of Net Position

Statement of Activities

Fund financial statements:

Governmental funds

Balance sheet

Statement of revenues, expenditures and

changes in fund balances

Reconciliations (2) to gov’t wide F/Ss

Proprietary funds

State of fund net position

Statement of revenues, expenses, and

changes in fund net position

Statement of cash flows

Fiduciary funds

Statement of fiduciary net position

Statement of changes in fiduciary net

position

Notes to the Financial Statements

4)Required supplementary information other than MD&A

Schedule of funding progress of pension plans

Schedule of employer contributions of pension plans

Budgetary comparison for the general and special

revenue funds

Information about infrastructure assets reported

using the modified approach (if applicable)

5)Other supplemental information

Combining statements, individual statements and

schedules

The statistical tables

Government-wide Financial Statements

The basic financial statements under GASB 34 are of two types,

i.e., government-wide and fund. There are only two government-

wide statements: 1) the statement of net position (balance sheet),

and 2) the statement of activities (statement of revenues and

expenses).

Statement of Net Position (Government-wide), Ill. 2-5

Would have separate columns for governmental and

business-type activities, and show component units

separately after the “totals” column

The difference between Assets and Liabilities is call Net

Position rather than Fund Equity, and is broken up

between those invested in capital assets, net of related debt, and restricted and unrestricted amounts. Major restricted

categories should be shown.

Statement of Activities (Government-wide), Ill. 2-6

Broken down by Primary Government, i.e., governmental

activities and business-type activities, and component units.

There is a comparison of expenses and program revenues,

with the net revenue (expense) shown for each primary

government activities and component units, and the net

increase or decrease in Net Position.

Both governmental and business-type activities would use

the economic resources measurement focus and full accrual

basis of accounting, requiring the same types of accruals

and amortizations, e.g., depreciation, as for proprietary

funds.

Fund Accounting

Under GASB 34, there are seven required funds statements,

divided into three categories. Governmental funds use the

spending (also called current financial resources) focus and

modified accrual basis of accounting. Proprietary funds and

fiduciary funds use capital maintenance focus and full accrual

accounting.

The statements for the governmental and proprietary funds

focus only on major funds, rather than being prepared by fund

type. Major funds must meet two conditions: (1) total assets,

liabilities, revenues, or expenditures/expenses of that individual

governmental fund constitute 10% of the governmental activities,

and (2) total assets, liabilities, revenues, or expenditures/expenses are 5% of the governmental and enterprise category. Any fund may be called major by the government if it feels that reporting it would be useful.

Nonmajor funds are aggregated into a single column.

The concept of major funds does not apply to fiduciary funds, which instead should present all fiduciary funds aggregated into a

separate column for each fund type: pension, investment trust,

private purpose trusts, and agency trusts. Also Internal Service

funds are just shown in a single column.

Governmental Funds:

Balance Sheet—Governmental Funds (Ill. 2-7)

Provides an overview of combined balance sheet accts of

gov’t unit by including the individual fund amounts in one

place. Reconciliation in Il. 2-7 is required.

The funds shown in Il. 2-7b are all major funds. No non-major funds are shown.

Broken up between Assets, Liabilities, and Fund Balance. Note that only current assets and liabilities are included, and that Fund Balance is broken up into 5 categories, i.e., nonspendable, restricted, committed, assigned and unassigned.

Supporting details of the combined F/Ss shown in the

funds statements are shown in the combining F/Ss of the

individual funds. Combining statements are used to support

and supplement the basic statementsand are included after

the fund financial statements.

Governments may elect to provide detailed information about component units in the form of combining statements.

The combining statements also provide the details of the nonmajor funds, e.g., Special Revenue Funds, Debt Service Funds, Capital Projects Funds and Permanent Funds, with one column for each of the funds, with the total tying into the nonmajor funds column of the fund statement.

Combining statements showing the details of Internal

Service funds can also be presented.

Statement of Revenues, Expenditures, and Changes in Fund

Balances – Governmental Funds (Ill. 2-8b)

Includes revenues and expenditures of governmental fund

types. Still has a spending focus and uses a modified

accrual method of accounting.

A separate column is used for each major fund type,

with all nonmajor funds aggregated in a single column.

(Note that the statement for the actual to budget comparison has

been relegated to required supplementary information.)

Reconciliation of Statement of Revenue, Expenditures, and

Changes in Fund Balances to the Statement of Activities is

required (Ill. 2-8a).

Proprietary Funds:

Statement of Net Position---Proprietary Funds (Ill.2-9)

Uses a classified balance sheet indicating current and

noncurrent assets and liabilities, with the difference

resulting in Net Position. The Net Position section indicates the investment in capital assets and the amounts of restricted and unrestricted assets.

Major funds have their own column, and nonmajor funds

are aggregated into a single column.

Statement of Revenues, Expenses, and Changes in Fund Net Position --– Proprietary Funds (Ill.2-10)

For those funds using the full accrual basis of accounting,

e.g. Enterprise & Internal Service

Split between Enterprise and Internal Service funds

activities. For Enterprise Funds, only major funds have

their own column and nonmajor funds are aggregated in

one column. All Internal Service funds are shown in one

column.

Statement of Cash Flows – Proprietary Funds (Ill. 2-11)

GAAP requires a cash flows statement for proprietary

funds since they are business oriented and use full accrual

accounting.

Provides information on operating, financing, and

investing activities

Direct method is required. Four categories rather than 3

used by FASB. Requires reconciliation from operating

income to cash flow from operations.

Fiduciary Funds:

Statement of Fiduciary Net Position (Ill. 2-12)

Focus is only on assets held in trust with parties

outside the government, e.g., individuals and other

governments.

It would have a separate column and show assets,

liabilities, and net position for each category of fiduciary

funds, i.e., pension, investment trust, private purpose funds,

and agency trusts.

2. Statement of Changes in Fiduciary Net Position(Ill. 2-13)

This statement would show addition, deduction, and

changes in net position for each category of fiduciary funds,

i.e., pension, investment trust, private purpose funds, and

agency funds.

Combining statements providing additional detail would

be in the supplementary information section for both the

balance sheet and operating statement.

Notes to F/Ss (Ill. 2-14)

Are a required part of CAFR and considered essential in

providing additional information to use in understanding and

analyzing the F/Ss.

The notes must include the schedules of capital assets and long-

term liabilities, which include reconciliation of beginning to

ending balances and the allocations of depreciation to the main

functions of the government.

Supplemental Information

The Combining Financial Statements of the individuals funds

are normally presented to provide additional, supporting

information. As part of the information, should include actual-to-

budget comparisons (Il. 2-16).

Normally a separate section is included in the CAFR for the

general fund, special revenue fund, debt service fund, capital

projects fund, enterprise funds, internal service funds, and trust

and agency funds. Under GASB 34, the account group

information (General Fixed Asset Account Group and General

Long Term Debt Account Group) is no longer a required

disclosure.

Statistical Section

The final section of F/Ss includes statistics on governmental unit

to provide useful information in assessing their financial

condition.

Fifteen individual tables are required, though gov’t units

are encouraged to add more