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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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

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Fund Financial Statements

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

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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

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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

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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

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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

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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
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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

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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
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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
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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

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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

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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