CHAPTER 10 State And Local Governments: Overview, Comprehensive Annual Financial Reports And Government-wide Statements

1. CHAPTER 10 State And Local Governments: Overview, Comprehensive Annual Financial Reports And Government-wide Statements

2. Learning Objectives • Able to • Identify various aspects of state and local governments including • Characteristics and nature • Financial reporting objectives • Financial reporting standards • Familiar with management discussion and analysis reporting requirement

3. Learning Objectives [cont’d] • Know the government-wide financial statement components • Statement of net assets • Statement of activities • Understand the display used in government-wide financial statements

4. Nature of Governments • Government entities are not just federal government • Extensive number of state and local governments • These entities are governed by GAAP(generally accepted accounting principals) which are set GASP

5. Levels of Government GAAP

6. Government GAAP • Requires the display of two distinct financial statements • Government-wide financial statements • Uses full accrual accounting recognition • Fund based financial statements • Uses both modified and full accrual accounting recognition

7. Financial Report Enables User to: • Asses the finances of the government including the current year’s operation • Determine whether the government’s overall financial position is improving or not. • Evaluate whether the government’s current year revenues were sufficient to pay for all the current year’s services. • Identify the government’s cost of providing services to its citizens

8. Users Abilities (cont’d) • Determine how the government finances its programs such as program revenues, user fees or tax revenues. • View the extent to which the government has invested resources in capital assets. • Provide the ability to compare financial data between governments

9. Characteristics of Government Entities • Organized to serve citizens in their jurisdiction • Principal source of revenue is taxes • A profit motive is rare • Each entity has an accountability and stewardship for resources entrusted to government • Measuring quality or quantity of services provided can be difficult

10. Characteristics of Government Entities [cont’d] • A government organization has one or more of the following • Officers elected by popular election • Possible dissolution of organization with net assets reverting to a government • Organization has power to enact and enforce tax levy • Organization has authority to issue tax-exempt debt

11. Who uses Government Financial Statement Financial Reporting provides information that facilitates decision making by user groups • Citizens of government entity • Direct representatives of citizens • Investors, creditors, and others in lending process

12. Financial Reporting Objectives • Accountability is paramount • Based on transfer of responsibility for resources or actions from citizens to some other party • Accountability fulfilled • Financial statement display the management of the government • Enable data users to determine interperiod equity

13. Financial Reporting Entity • Primary Government • State or Local general-purpose government • Component Units • Legally separate organizations which • Elected officials of primary government are financially accountable • Financial accountability exists • May impose a financial burden or provide a financial benefit

14. Methods for Including Components in Financial Information • Blending • Adding of assets, liabilities, etc. to the primary government financial statements • Discrete Presentation • Presents the financial information of the component units in a separate discrete column on the primary government financial statements

15. Governmental Financial Plan • Financial plan of government is a budget • Provides means of control • Expresses public policy and financial intent of government entity • Enacted budgets usually considered law • Generally must be balanced

16. Governmental Financial Budgets • Criteria provided by GASB governmental budgets includes: • Annual budgets should be adopted by every government entity • Accounting system should provide basis for appropriate budgetary control • Common terminology and classification should be used consistently throughout budget, accounts, and financial reports

17. Governmental Budgets • Major types • Annual operating budget • Estimated revenues and appropriations for a specific fiscal period • Provides device for management and control • Capital budget • Control the expenditures for construction projects, plant, and fixed asset acquisitions • Other types include budgets to track objects, programs or performance

18. Financial Reporting Uses • Financial reports provide data for comparing legally adopted budgets with actual results. • Financial reports are essential for demonstrating compliance with legally mandated activities

19. Financial Reporting Uses [cont’d] • Displays performance effectiveness or efficiency • Provides the level of service efforts • Inputs • Outputs • Outcomes

20. Revenue Recognition • The GASB classified nonexchange transactions into four classifications • Derived tax revenues • Imposed nonexchange revenues • Government-mandated nonexchange transactions • Voluntary nonexchange transactions

21. Derived Tax Revenues • Assessments imposed by governments on exchange transactions • Typically are taxes that are charged when an event occurs • Examples include – personal income tax, corporate or franchise taxes and sales taxes

22. Imposed Nonexchange Revenues • Assessments by the government on nongovernmental entities • Typically are levied taxes • Examples include property taxes, fines, penalties and property forfeitures

23. Government-mandated Nonexchange Revenues • A government provides resources to another government and requires that the recipient government use the resources for a specific use • Typically this is resources provided by the federal government to state government or state government to city or county governments • An example is the federal government providing the state government resources to train rural fire fighters • Another example is the state government providing the city government resources for social work or criminal justice programs.

24. Voluntary Nonexchange Revenues • Transfer of resources from one party to another without any expectation of receiving anything of equal value in return. • Can be based on on either written or oral agreement • Examples include gifts, grants and donations • Recognized only if recipient is eligible to use resources

25. Eligibility Recognition Requirements • No recognition if not met • Recipient has characteristics set forth by the provider • Time requirements [advance payments are recognized as deferred revenue] • Allowable costs have been incurred for which the provider will reimbursement • Contingencies outlined by the provider have been achieved

26. Expense Recognition • Similar to for-profit entities • Reflects the cost of operating the enterprise • Government-wide reporting uses full accrual recognition - expenses • Fund financial statements employ modified accrual accounting - expenditures

27. Expense Recognition (cont’d) • Compensated absences • Government-wide reporting recognizes costs as earned • Fund based reporting recognizes only obligations of current financial resources • Interest • Government-wide reporting recognizes interest cost when obligated • Fund based reporting recognizes interest cost when due and payable

28. Expense Recognition (cont’d) • Infrastructure • Government-wide reporting capitalizes asset when acquired and recognizes depreciation • May use an optional modified approach for infrastructure recognition • Fund based reporting does recognize acquired fixed assets or infrastructure

29. Expense Recognition (cont’d) • Solid waste landfills • Government-wide reporting accrues costs as incurred and recognizes liabilities • Fund based reporting recognizes only current period costs

30. Governmental Financial Report Users • GASB Concept Statement No. 1 identifies three primary users groups of governmental financial reports: • Citizenry • Legislative and Oversight Officials • Investors and Creditors

31. State and Local Government Financial Statements • GASB Standard No. 34 requires state and local governments to report dual perspective financial information with both full accrual and fund-based modified accrual.

32. State and Local Government Financial Statements [cont’d] • Full accrual information • Divulges total cost of providing services • Include a narrative description of past as well as a financial performance forecast • Modified accrual information • Based upon recognition of revenues in the period it is measurable and available and expenditures when liability is incurred

33. Management Discussion and Analysis Government-Wide Financial Statements Fund Financial Statements Financial Statement Notes Required Supplemental Information

34. Governmental Financial Groups • GASB identifies three groups: • Governmental – day to day operations • Proprietary – enterprise or business-type activities • Fiduciary – funds held in trust for others • Government-wide financial statements includes only governmental and business-type activities • Fund financial statement includes all three groups

35. Government Reporting Matrix

36. Proprietary Group Reporting Matrix

37. Fiduciary Group Reporting Matrix

38. Financial Report Components • Management Discussion and Analysis (MD&A) • Proceeds the financial statements presentation • Presents an overview of financial activities for the past year. • Compares the current year with prior year. • May include charts, graphs, or tables • Discussion is general rather than specific • Projections or assumptions should not be included

39. Management Discussion and Analysis (MD&A) • MD&A must include the following eight major information component and fourteen elements that are part of the second component: • Brief discussion of basic financial statements • Condensed financial information from government-wide financial statements comparing current year to prior year • Total assets, distinguish between capital and other.

40. Management Discussion and Analysis (MD&A) cont’d • Total liabilities, distinguish between long-term and other liabilities • Total net assets, distinguish between amounts invested in capital assets net of related debt, restricted amounts and unrestricted amounts • Program revenues by major source • General Revenues by major source • Total revenues

41. Management Discussion and Analysis (MD&A) cont’d • Program expenses by function performed • Total expenses • Excess revenue over expenses or deficiency • Contributions • Special and extraordinary items • Transfers between government funds • Changes in net assets • Net assets at the end of the year

42. Management Discussion and Analysis(MD&A) cont’d • Analysis of overall financial position • Analysis of individual fund balances and transactions • Analysis of significant variations between original and final budget amounts • Description of capital asset and long-term debt activities • Discussion of condition of current infrastructure assets • Discussion of currently known facts expected to significantly affect government’s financial position.

43. Government-Wide Financial Statements • Statement of Net Assets – Similar to corporate balance sheet • Statement of Activities – Similar to corporate income statement

44. Government-Wide Financial Statements [cont’d] • Presentation distinguishes between • Primary Government • Component Units of Government • Primary Government displays governmental activities and business-type activities with combined total • Component unit information is displayed in discrete column that is not combined with primary government data

45. Statement of Net Assets • Displays information about government as whole • Classified format optional • Displays net assets in three components • Capital Assets net of accumulated depreciation and related debt • Restricted Net Assets nonexpendable or expendable • Unrestricted Net Assets • Designations or allocations may not be displayed on the face of the statement but can be disclosed in the notes

46. Statement of Activities • Displays revenues recognized for the current period with the current period’s recognized expenses • Reports revenues by type • Reports expenses by functions/programs

47. Statement of Activities • Expenses reduced by related revenue • Displays extent to which program relies on general governmental revenues • May be referred to as the program statement as the statement displays the amount of program costs funded by tax levies or other government revenues.