Chapter 9: Financial Reporting of State and Local Governments

Chapter 9: Financial Reporting of State and Local Governments

The Government Reporting Entity

  • Primary Government

    • Includes state or general-purpose governments, special purpose governments, special districts, boards, commissions, and other agencies.

  • Special Purpose Governments

    • These may focus on specific areas such as water or transportation. These are legally separate and fiscally independent. Legally separate means having an identity of its own as “artificial person”. Fiscally Independent has the authority to budget, levy its own taxes, set rates or charges, and issue bonded debt without approvval of another government.

  • Special Districts: All organized entities established to provide specific services within a defined geographic area, often with their own governing bodies and the ability to levy taxes or charge fees for services rendered. Authorized by state law to provide only one or a limited number of designated functions. About 57% of local governments are special districts.

Financial Reporting Entity

  • The GASB (Governmental Accounting Standards Board) asserts that financial reporting should encompass all governments and organizations accountable to elected officials.

  • Collectively, these are termed the financial reporting entity.

    • Defined as the primary government plus organizations for which it holds financial accountability.

Financial Accountability (1 of 3)

  • A primary government is financially accountable for another organization if:

    • It appoints a voting majority of the organization’s governing board AND

    • It can impose its will OR

    • There is potential for the organization to provide specific financial benefits or impose specific financial burdens on the primary government.

Financial Accountability (2 of 3)

  • Defining the Relationship:

    • The relationship exists if the primary government:

    • Is entitled to the organization’s resources.

    • Is obligated to finance the organization’s deficits or assumes other obligations related to the organization’s debt.

Financial Accountability (3 of 3)

  • A primary government is financially accountable if the organization is fiscally dependent, meaning it lacks authority to:

    • Determine its own budget.

    • Levy taxes or set rates or charges.

    • Independently issue bonded debt without another government’s ability

Component Units

  • Definition:

    • Component units are separate organizations for which elected officials of the primary government are financially accountable, essentially becoming part of the reporting entity.

  • Examples:

    • Not-for-profit organizations, for-profit firms, and non-primary governments.

Presentation of Component Units

  • Blended Presentation:

    • Financial data for a component unit is integrated with the primary government’s similar fund types and activities. Due to many interconnections

  • Discrete Presentation:

    • Component unit's financial data is reported in separate columns from the primary government’s data. one ore more columns to the right of the columns presenting the financial information of the primary government. or in one or more rows below the rows presenting the financial information of the primary government.

  • Major Component Unit: Not defined the same as a major fund. It id considered major based on the nature and significance of the component unit’s relationship to the primary government.

Component Unit Assessment

  • To determine if a component unit is part of the primary government, and subject to blending consider:

    • Does the governing body substantially resemble that of the primary government?

    • Is there a financial benefit/burden relationship?

    • Does the primary government have operational responsibility?

    • Whether the component exists primarily to provide services for the primary government

    • Component unit’s debt is paid entirely or almost entirely from the primary government

    • Whether the component unit is a not-for-profit in which the primary government is the only corporate member

Discrete Presentation Criteria

  • Used when:

    • The component unit must not meet blending criteria.

    • It is a legally separate, tax-exempt organization fulfilling two conditions:

    • Assets are for the direct benefit of the primary government or its constituents.

    • Primary government is entitled to, or can access, a significant portion of the component unit's assets.

Blended Presentation Requirements

  • If using blended presentation, report:

    • Funds of the component unit as the primary government's specific fund type (e.g., special revenue).

    • General fund of the component unit as a special revenue fund of the primary government.

Other Government Organizations

  • Include: governments that do not meet the definition of a primary government but have basis for financial reporting entity if they issue separate financial statements

    • Joint Ventures: Organizations owned jointly. two or more participants that retain an ongoing financial interest and financial responsibility.

    • Jointly governed organizations

    • Other stand-alone governments: does not have a separately elected governing body and does not meet the definition of a component unit. Some special purpose governments can meet the definition

Government Financial Reporting

  • Frequency:

    • Financial reports should be prepared periodically throughout the fiscal year as well as at year-end.

    • Interim Reports:

    • Reports issued during the fiscal period to help government administrators and legislative finance committee members stay informed.

Suggested Interim Reports

  • Key reports include:

    • Schedule of actual vs. budgeted revenue (general fund and special revenue funds).

    • Schedule of actual vs. budgeted expenditures. ( general fund and special revenue funds)

    • Comparative schedule of revenue and expenses (for enterprise and internal funds).

    • Combined schedule of cash receipts, disbursements, and balances.

    • Cash position forecasts for all funds.

Annual Financial Reports Stakeholders

  • Users:

    • Management, legislature, creditors, higher governments, citizens, debt rating agencies, news media, and other users of annual financial reports.

Comprehensive Annual Financial Report (CAFR) Or Annual Comprehensive Financial Report (ACFR)

  • Definition:

    • A CAFFR is an official report by governments including required general purpose external financial reporting items such as:

    • Management's Discussion and Analysis (MD&A)

    • Basic government-wide and fund financial statements with notes.

    • Required supplementary information (RSI).

  • Additional contents include:

    • Individual fund statements and combining financial statements.

    • Narrative explanations, a statistical section, and other relevant materials.

    • If audited, the auditor's report should be included.

Sections of a CAFR

  1. Introductory Section:

    • Typically not audited, may include subjective information, forecasts.

    • Contains:

      • Table of contents.

      • Letter of transmittal: cite legal and policy requirements

      • summary discussion of factors related to service programs and financial matter

      • Other relevant material from management.

      • Not duplicated in the MD%A

      • Not covered by the auditor’s report, may present subjective nature, including prospective information like forecasts and expectations.

  2. Financial Section:

    • Minimum content must include:

      • Auditor's report.

      • MD&A.

      • Basic financial statements (government-wide and fund financial statements) and notes.

      • Government-wide includes statement of net position and activities

      • Fund financial statements consist of 1. Governmental balance sheets and statements of revenues, expenditures, and changes in fund balances 2. Proprietary funds statement of net position and statement of revenues, expenses, and changes in fund net position. and statement of cash flows 3. Fiduciary funds statement of net position and statement of changes in fiduciary net position.

      • Notes to the financial statements

      • Required supplementary info excluding MD&A, including budgetary comparison.

      • Combining and individual fund statements and schedules.

  3. Statistical Section:

    • GASB defines five categories for inclusion, with at least 10 years of data for each category:

    • Financial trends information: how a government financial position changes overtime

    • Revenue capacity information: provides insight into a government's ability to generate revenue from its various sources,

    • Debt capacity information: debt burden and issue additional debt

    • Demographic and economic information: socioeconomic environment

    • Operating information: financial condition and operations and

Financial Trends Information

  • Showcases changes in a government’s financial position over time, emphasizing trends in fund balances and net position at both fund and government-wide levels.

Revenue Capacity Information

  • Indicates the government's ability to generate revenue, showing:

    • Revenue base information.

    • Revenue rates.

    • Principal revenue sources and information like property tax levies and collection success.

Debt Capacity Information

  • Displays existing debt burdens and government debt issuance capability, covering:

    • Ratios of outstanding debt to total personal income.

    • Details around direct and overlapping debt, and legal limitations and margins for debt.

Demographic and Economic Information

  • Illustrates the socioeconomic factors affecting the government’s operations, detailing:

    • Personal income levels.

    • Unemployment rates.

    • Major employers in the area.

Operating Information

  • Provides context for governmental operations and resources, including:

    • Number of government employees.

    • Indicators of service demand or levels.

    • Data on capital assets.

Preparing the Financial Statements

  • Sponsored activities require the preparation and posting of all necessary adjusting entries, including for depreciation:

    • A preclosing trial balance is prepared for necessary information on governmental activities in the financial statements.

    • All temporary accounts are closed.

    • Reclassification entries are made for the three net position accounts.

    • Government-wide statements of net position and activities are prepared.

Fund Financial Statements

  • Requirements:

    • Fund financial statements are needed for all governmental and proprietary funds.

    • Governmental Fund Financial Statements must include:

    • Balance sheet for governmental funds.

    • Statement of revenues, expenditures, and changes in fund balances for governmental funds, where fund balances are classified as:

      • Nonspendable

      • Restricted

      • Committed

      • Assigned

      • Unassigned (only positive in General Fund).

Required Reconciliations

  • Necessary reconciliations to the governmental activities column of fund financial statements include:

    • Adjustments for:

    • Issuance of long-term debt

    • Accrued expenses

    • Interfund transfers

    • Retirement of long-term debt

    • Capital outlays

    • Depreciation on capital assests

    • Disposition of capital assets.

    • Some revenues

    • Adjusting for internal service funds

    Intra-entity transactions: exchange or nonexchainge transactions between primary government and its blended or discretely presented component units

Other topics: four topics electronic reporting, popular, special purpose frameworks, and internation government standards.

  • Special purpose framework: Also called OCBOA other comprehensive basis of accounting

  • Popular reports: also called citizens centric reports

  • Interational Public Sector Accounting Standards Board (IPSASB) issues International public sector accounting standards (IPSAS)

Quiz Questions

  1. The museum is a component unit of the city

  2. Raider City issued legally separate financing corporation to issue the city will pay the corporations debt =Blended component unit

  3. Component unit is major if it has a significant relationship with the primary government

  4. CAFR contains statement of cash flows for proprietary funds not governmental funds

  5. Intra-entity transactions definition

  6. Primary government is fiscally independent, legally separate organization, separately elected governing body

  7. Committed fund balance= set by the government’s highest authority(City Council)

  8. Fiduciary funds require change in net position

  9. Positive unassigned fund balance = general fund

  10. Restricted funds= external legally binding limits

Looking Forward

  • The chapter delved into financial reporting for state and local governments, with emphasis on component units and CAFR contents.

  • Required reconciliations were outlined, setting the stage for Chapter 10 which addresses accountability for public funds and the analysis of government financial performance.