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Slides for EOG on The New Reporting Model


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Slides for EOG on The New Reporting Model

  1. 1. An Elected Official’s Guide The New Reporting Model
  2. 2. Introduction
  3. 3. What Is GASB Statement No. 34? <ul><li>Issued in June 1999 </li></ul><ul><li>Establishes a new framework or “reporting model” for state and local government financial reports </li></ul><ul><li>Biggest change in the history of public-sector accounting </li></ul>
  4. 4. <ul><li>Traditional model originated early in the 20th century </li></ul><ul><li>Definitive form of traditional model set by NCGA Statement 1 (1979) </li></ul><ul><ul><li>Widely adopted in the 1980s </li></ul></ul><ul><ul><li>Considered a major improvement </li></ul></ul><ul><ul><li>Still, consensus gradually emerges on need for improvement </li></ul></ul>What Does the New Model Replace?
  5. 5. How New is the New Model? <ul><li>Retains the most popular features of the traditional model </li></ul><ul><li>Adds several significant new features </li></ul><ul><li>Goal: </li></ul><ul><ul><li>Retain and better serve current users </li></ul></ul><ul><ul><li>Attract new users not served previously </li></ul></ul>
  6. 6. <ul><li>Government-wide financial reporting </li></ul><ul><li>Additional long-term focus for governmental (i.e. tax-supported) activities </li></ul><ul><li>Narrative introductory overview and analysis </li></ul><ul><li>Information on major individual funds </li></ul><ul><li>Expanded budgetary reporting </li></ul>What Are the Key New Features?
  7. 7. What about Infrastructure? <ul><li>Most controversial feature of new model </li></ul><ul><li>GFOA position </li></ul><ul><ul><li>Each government must make its own decision regarding the implementation of infrastructure reporting </li></ul></ul><ul><ul><li>Governments that elect to report infrastructure should take a least-cost approach to implementation </li></ul></ul>
  8. 8. What Determines When to Implement? <ul><li>Timing of implementation depends upon total revenues </li></ul><ul><ul><li>Only revenues of governmental funds and enterprise funds of the primary government </li></ul></ul><ul><ul><li>Exclude other financing sources and extraordinary items </li></ul></ul><ul><ul><li>Measured as of the first fiscal year ended on or after 6/30/99 </li></ul></ul>
  9. 9. What is the Implementation Schedule?
  10. 10. Background and Overview Part 1
  11. 11. What is a Financial Reporting Model? <ul><li>Three ways to provide needed information: </li></ul><ul><ul><li>Display (i.e., financial statements) </li></ul></ul><ul><ul><li>Disclosure (i.e., notes) </li></ul></ul><ul><ul><li>Additional information (i.e., required supplementary information) </li></ul></ul><ul><li>Reporting model defines minimum combination of these three elements </li></ul><ul><li>GASB defines for state/local governments </li></ul>
  12. 12. Scope of the Reporting Model
  13. 13. How Many Models Are There? <ul><li>Two private-sector models </li></ul><ul><ul><li>Business model </li></ul></ul><ul><ul><li>Not-for-profit model </li></ul></ul><ul><li>One model for state and local governments </li></ul><ul><ul><li>Unique </li></ul></ul><ul><ul><li>Still, many similarities to private-sector models </li></ul></ul>
  14. 14. Summary of Reporting Models
  15. 15. Why Separate Models? <ul><li>Two key reasons why government has always had a separate model </li></ul><ul><ul><li>Special need to ensure and demonstrate compliance with legal requirements </li></ul></ul><ul><ul><ul><li>External restrictions (e.g., grants and bond indentures) </li></ul></ul></ul><ul><ul><ul><li>Internal restrictions (e.g., operating budget) </li></ul></ul></ul><ul><ul><li>Desire to focus on near-term financing requirements (like the operating budget) </li></ul></ul>
  16. 16. What Are the Key Differences? <ul><li>Use of fund accounting </li></ul><ul><li>Use of special accounting for tax-supported activities </li></ul><ul><li>Presentation of budgetary comparisons in connection with regular financial reporting </li></ul>
  17. 17. Why the Need for a New Model? <ul><li>Financial reporting must demonstrate both </li></ul><ul><ul><li>Fiscal accountability and </li></ul></ul><ul><ul><li>Operational accountability </li></ul></ul><ul><li>Fiscal accountability already strong, but can be made even stronger </li></ul><ul><li>Operational accountability needs to be significantly enhanced </li></ul>
  18. 18. <ul><li>Introduction of government-wide financial statements </li></ul><ul><li>Expanded focus for governmental activities </li></ul><ul><li>Presentation of cost data </li></ul><ul><li>Narrative overview and analysis </li></ul>How To Improve Operational Accountability?
  19. 19. How To Improve Fiscal Accountability? <ul><li>Shift in focus to major individual funds </li></ul><ul><li>Shift in focus to individual fund budgets </li></ul><ul><li>Inclusion of data from the original budget </li></ul>
  20. 20. What is the Basic Structure of the New Model? <ul><li>“Basic financial statements” </li></ul><ul><ul><li>Government-wide financial statements </li></ul></ul><ul><ul><li>Fund financial statements </li></ul></ul><ul><ul><ul><li>Governmental funds (tax-supported activities) </li></ul></ul></ul><ul><ul><ul><li>Proprietary funds (business-type activities) </li></ul></ul></ul><ul><ul><ul><li>Fiduciary funds (not available for programs) </li></ul></ul></ul><ul><ul><li>Notes to the financial statements </li></ul></ul><ul><li>Required supplementary information (RSI) </li></ul>
  21. 21. Basic Financial Statements <ul><li>Government-wide statements (2) </li></ul><ul><li>Fund statements </li></ul><ul><ul><li>Governmental fund statements (2 or 3) </li></ul></ul><ul><ul><li>Proprietary fund statements (3) </li></ul></ul><ul><ul><li>Fiduciary fund statements (2) </li></ul></ul><ul><li>Notes to the financial statements </li></ul>
  22. 22. RSI <ul><li>Management’s discussion and analysis (MD&A) </li></ul><ul><li>Other RSI (as needed) </li></ul><ul><ul><li>Budgetary comparisons </li></ul></ul><ul><ul><li>Infrastructure data (modified approach) </li></ul></ul><ul><ul><li>Pension trend data </li></ul></ul><ul><ul><li>Claims development trend data </li></ul></ul>
  23. 23. New Governmental Model
  24. 24. New Model Within the CAFR <ul><li>Introductory Section of CAFR </li></ul><ul><li>Financial Section of CAFR </li></ul><ul><ul><li>Basic financial statement and RSI (new reporting model) </li></ul></ul><ul><ul><li>Combining and individual fund presentations </li></ul></ul><ul><li>Statistical section of CAFR </li></ul>
  25. 25. Key Components of the New Model Part 2
  26. 26. What is the Purpose of MD&A? <ul><li>Narrative introduction and overview </li></ul><ul><li>Analysis of key data </li></ul><ul><ul><li>Why significant increases or decreases? </li></ul></ul><ul><ul><li>Why is the original budget for the general fund different from the final amended budget? </li></ul></ul><ul><ul><li>Why has the fund balance of the general fund increased or decreased? </li></ul></ul>
  27. 27. What Can Be Found in MD&A? <ul><li>Relationship among financial statements </li></ul><ul><li>Condensed comparative statements </li></ul><ul><li>Overall analysis </li></ul><ul><li>Major fund analysis </li></ul><ul><li>Budget variances for general fund </li></ul><ul><li>Capital asset and long-term debt activity </li></ul><ul><li>Known facts, decisions or conditions expected to have a significant impact </li></ul>
  28. 28. Is MD&A Reliable? <ul><li>RSI is reliable, but still has certain inherent limitations </li></ul><ul><ul><li>Information is necessarily selective rather than comprehensive </li></ul></ul><ul><ul><li>Analysis is always subjective to some degree </li></ul></ul><ul><ul><li>MD&A not included within the scope of the independent audit </li></ul></ul><ul><ul><ul><li>Still subject to limited auditor procedures </li></ul></ul></ul>
  29. 29. What are the Entity-Wide Statements? <ul><li>Two Government-wide basic financial statements </li></ul><ul><ul><li>Statement of net assets </li></ul></ul><ul><ul><li>Statement of activities </li></ul></ul>
  30. 30. What is the Statement of Net Assets? <ul><li>Reports all assets and liabilities </li></ul><ul><ul><li>Both financial assets and capital assets (including infrastructure) </li></ul></ul><ul><ul><li>Both current and long-term liabilities </li></ul></ul><ul><li>Presentation options </li></ul><ul><ul><li>Order of relative liquidity </li></ul></ul><ul><ul><li>Current versus long-term (i.e., “classified”) </li></ul></ul><ul><li>Difference = “net assets” </li></ul>
  31. 31. How are Net Assets Reported? <ul><li>Presentation based on accessibility of underlying assets </li></ul><ul><ul><li>Net investment in capital assets </li></ul></ul><ul><ul><li>Restricted </li></ul></ul><ul><ul><li>Unrestricted </li></ul></ul>
  32. 32. Components of Net Assets
  33. 33. What is the Statement of Activities? <ul><li>All changes in government-wide net assets </li></ul><ul><li>Focus on expenses rather than expenditures </li></ul><ul><li>Order of presentation </li></ul><ul><ul><li>Service focus rather than revenue focus </li></ul></ul><ul><ul><li>Expenses (cost of services) precede revenues </li></ul></ul><ul><li>Net cost format demonstrates degree to which an activity is self-financing </li></ul>
  34. 34. Structure of Statement of Activities <ul><li>Start: Expenses by function </li></ul><ul><li>Less: Program revenues (directly related fees, charges and grants) </li></ul><ul><li>Result: Net expenses by function </li></ul><ul><li>Add: General revenues and other changes </li></ul><ul><li>Result: Increase/decrease in net assets </li></ul>
  35. 35. Why Entity-Wide Statements? <ul><li>Focus on the “big picture” (a government is more than the sum of its parts) </li></ul><ul><li>Demonstrate the total impact of the short-term financing decisions reported in the governmental funds </li></ul><ul><li>Provide cost information (i.e. expenses ), for activities reported in governmental funds </li></ul>
  36. 36. How Wide is “Government-wide”? <ul><li>Primary government (government as legally defined) </li></ul><ul><li>Component units (legally separate entities for which the primary government is financially accountable) </li></ul><ul><li>NOT fiduciary funds or fiduciary-type component units </li></ul>
  37. 37. Why Two Types of Activities? <ul><li>Governmental activities </li></ul><ul><ul><li>Tax-supported </li></ul></ul><ul><ul><li>Program revenues not expected to cover expenses </li></ul></ul><ul><li>Business-type activities </li></ul><ul><ul><li>At last partially supported by fees and charges </li></ul></ul><ul><ul><li>Program revenues expected to cover all or a significant portion of program expenses </li></ul></ul><ul><li>Division avoids inappropriate comparisons </li></ul>
  38. 38. <ul><li>Accounting versus financing </li></ul><ul><ul><li>Accounting - focus on when liability incurred </li></ul></ul><ul><ul><li>Financing - focus on when liability paid </li></ul></ul><ul><li>Governments typically focus on financing </li></ul><ul><ul><li>Resources raised when needed for payments </li></ul></ul><ul><li>Deficit unrestricted net assets = commitment of future taxing power </li></ul>Negative Unrestricted Net Assets?
  39. 39. Why No Similar Deficit for Businesses? <ul><li>Businesses categorize net assets based on source rather than accessibility </li></ul><ul><ul><li>Invested net assets (e.g., capital stock, owner’s equity) </li></ul></ul><ul><ul><li>Retained earnings </li></ul></ul><ul><li>Practical result: Capital assets offset long-term liabilities of businesses </li></ul>
  40. 40. Does Surplus = Money to Spend? <ul><li>Capital assets reported net of related debt </li></ul><ul><ul><li>Capital assets cannot actually be used to pay off debt </li></ul></ul><ul><ul><li>Debt service must be paid from restricted and unrestricted net assets </li></ul></ul><ul><li>Therefore, positive balance of unrestricted net assets does not necessarily = money to spend </li></ul><ul><li>Look to governmental fund statements for information on spendable resources </li></ul>
  41. 41. How To Use Cost Information? <ul><li>Distinguish direct costs from indirect costs </li></ul><ul><li>Distinguish avoidable costs from unavoidable costs </li></ul><ul><li>Depreciation is based upon historical cost rather than replacement cost </li></ul><ul><ul><li>Care needed in making comparisons </li></ul></ul><ul><ul><li>“Funding” depreciation expense may not provide adequate resources for replacement </li></ul></ul><ul><ul><li>Rate setting must consider cash flows </li></ul></ul>
  42. 42. Why Are Some Items Shown Separately? <ul><li>Need to avoid artificial fluctuations in trend data </li></ul><ul><li>“Extraordinary items” </li></ul><ul><ul><li>Unusual in nature and </li></ul></ul><ul><ul><li>Infrequent in occurrence </li></ul></ul><ul><li>“Special items” </li></ul><ul><ul><li>Unusual in nature or infrequent in occurrence </li></ul></ul><ul><ul><li>Subject to management control </li></ul></ul>
  43. 43. What Are Govt. Fund Statements? <ul><li>Governmental fund balance sheet </li></ul><ul><li>Governmental fund statement of revenues, expenditures and changes in fund balances </li></ul><ul><li>Budgetary comparison (optional as basic financial statement) </li></ul>
  44. 44. What is the GF Balance Sheet? <ul><li>Financial assets </li></ul><ul><li>Liabilities to be be paid from available expendable resources </li></ul><ul><li>Difference = fund balance </li></ul><ul><ul><li>Reserved fund balance = unavailable for appropriation </li></ul></ul><ul><ul><li>Designated unreserved fund balance = tentative management plans </li></ul></ul>
  45. 45. Structure of Fund Balance
  46. 46. What Is the GF Operating Statement? <ul><li>Statement of revenues, expenditures and changes in fund balances </li></ul><ul><li>Other financing sources and uses reported separately to avoid distorting trend data </li></ul><ul><ul><li>Issuance of debt (including capital leases) </li></ul></ul><ul><ul><li>Sale of capital assets (if not “special item”) </li></ul></ul><ul><ul><li>Transfers </li></ul></ul><ul><ul><li>Refunding transactions </li></ul></ul>
  47. 47. What is the Budgetary Comparison? <ul><li>Compare </li></ul><ul><ul><li>Original budget to final amended budget </li></ul></ul><ul><ul><li>Final amended budget to actual (presented on the budgetary basis) </li></ul></ul><ul><li>Options </li></ul><ul><ul><li>Basic financial statement (GFOA recommended practice consistent with current practice) </li></ul></ul><ul><ul><li>Required supplementary information </li></ul></ul>
  48. 48. Why GF Financial Statements? <ul><li>Most decisions in public sector made in context of operating budget </li></ul><ul><ul><li>Focus on near-term inflows and outflows of spendable resources </li></ul></ul><ul><ul><li>Includes budgeted items not otherwise reported in operating statement (e.g., capital outlay) </li></ul></ul><ul><ul><li>Excludes from operating statement items not typically budgeted (e.g., the incurrence of liabilities payable in future years, depreciation) </li></ul></ul>
  49. 49. Deficit Unreserved Fund Balance? <ul><li>Deficit = claims on current financial resources exceed the balances of those resources </li></ul><ul><li>Always to be taken seriously </li></ul><ul><li>Situations that may justify deficit: </li></ul><ul><ul><li>Encumbered long-term contracts </li></ul></ul><ul><ul><li>Long-term borrowings from other funds </li></ul></ul>
  50. 50. Deficit of Revenues to Expenditures? <ul><li>Deficit may indicate a fund is “living beyond its means” </li></ul><ul><li>Situations that may justify deficit: </li></ul><ul><ul><li>“Budgeting” excess fund balance </li></ul></ul><ul><ul><li>Up-front contributions for capital projects </li></ul></ul><ul><ul><li>Debt-financed capital projects </li></ul></ul><ul><ul><li>Reimbursement grants </li></ul></ul><ul><ul><li>Planned operating subsidies </li></ul></ul>
  51. 51. Why Are the Numbers Different? <ul><li>Difference between governmental funds and governmental activities in the government-wide financial statements </li></ul><ul><ul><li>Financial assets versus total assets </li></ul></ul><ul><ul><li>Liabilities that are due and payable versus total liabilities </li></ul></ul><ul><ul><li>Capital outlay versus depreciation </li></ul></ul><ul><ul><li>Debt issuance and principal repayment </li></ul></ul>
  52. 52. Why Are the Numbers Different? (cont.) <ul><ul><li>Immediate recognition versus deferral and amortization </li></ul></ul><ul><ul><li>Revenue when available versus revenue when earned </li></ul></ul><ul><ul><li>Internal service fund activities and balances </li></ul></ul>
  53. 53. Summary of Differences
  54. 54. Summary of Differences (cont.)
  55. 55. What are Proprietary Statements? <ul><li>Statement of net assets </li></ul><ul><li>Statement of revenues, expenses and changes in fund net assets </li></ul><ul><li>Statement of cash flows </li></ul>
  56. 56. What is the PF Statement of Net Assets? <ul><li>Essentially the same format as government-wide statement of net assets </li></ul><ul><li>Current assets and liabilities separated from long-term assets and liabilities </li></ul><ul><li>Net assets classified based upon accessibility rather than source (unlike businesses) </li></ul>
  57. 57. What is the PF Statement of Changes? <ul><li>Operating items distinguished from nonoperating items </li></ul><ul><ul><li>Demonstrates the degree to which a fund recovers the costs of the services it provides </li></ul></ul><ul><li>Nonoperating items </li></ul><ul><ul><li>Capital grants </li></ul></ul><ul><ul><li>Operating subsidies </li></ul></ul><ul><ul><li>Other </li></ul></ul>
  58. 58. What is the PF Statement of Cash Flows? <ul><li>Positive or negative cash flow? Not evident from operating statement (unlike governmental funds) </li></ul><ul><li>What are the sources and uses of cash? </li></ul><ul><ul><li>Operating activities </li></ul></ul><ul><ul><li>Noncapital financing activities </li></ul></ul><ul><ul><li>Capital and related financing activities </li></ul></ul><ul><ul><li>Investing activities </li></ul></ul>
  59. 59. Operating Income v. Operating Cash
  60. 60. Operating Income v. Operating Cash (cont.)
  61. 61. Operating Income v. Operating Cash (cont.)
  62. 62. Operating Income v. Operating Cash (cont.)
  63. 63. Should An EF Always Support Itself? <ul><li>Some enterprise funds designed to recover full cost </li></ul><ul><li>Other enterprise funds designed to recover only a portion of their cost (subsidy reflects perceived indirect benefit to general public) </li></ul><ul><li>Must distinguish between the two situations </li></ul>
  64. 64. Surplus/Deficit in Internal Service Fund? <ul><li>Role of internal service fund = allocation of cost </li></ul><ul><li>Ideally “break even” basis </li></ul><ul><ul><li>Exception for “working capital” needs </li></ul></ul><ul><ul><li>Exception for replacement of capital assets </li></ul></ul><ul><li>Substantial ongoing surplus/deficit may mean that charges are excessive or insufficient </li></ul>
  65. 65. What are Fiduciary Funds? <ul><li>Resources not available to support government programs </li></ul><ul><ul><li>Pension funds </li></ul></ul><ul><ul><li>Investment pools </li></ul></ul><ul><ul><li>Private-purpose trusts </li></ul></ul><ul><ul><li>Agency funds (e.g., tax collections for other governments) </li></ul></ul>
  66. 66. What are Fiduciary Fund Statements? <ul><li>Statement of fiduciary net assets </li></ul><ul><li>Statement of changes in fiduciary net assets </li></ul>
  67. 67. Does Pension Surplus = Full Funding? <ul><li>Accounting liabilities versus actuarial liabilities </li></ul><ul><li>Present value of pension benefits earned (actuarial accrued liability) is not an accounting liability and so is not reported </li></ul><ul><li>Therefore, positive net assets does not mean full funding </li></ul>
  68. 68. RSI Part 3
  69. 69. What is the Budgetary Comparison? <ul><li>Contents </li></ul><ul><ul><li>Original budget </li></ul></ul><ul><ul><li>Final amended budget </li></ul></ul><ul><ul><li>Actual (reported using budgetary basis of accounting) </li></ul></ul><ul><ul><li>Variance column (optional) </li></ul></ul><ul><li>Option to report as basic financial statement or RSI (general fund and major special revenue funds) </li></ul>
  70. 70. Are Budget Amendments Bad? <ul><li>Budgeting based on estimates </li></ul><ul><ul><li>Amendments are frequent </li></ul></ul><ul><li>Meaning of significant differences between original and final amended budget </li></ul><ul><ul><li>Usually, an appropriate response to unforeseen changes </li></ul></ul><ul><ul><li>May indicate weakness in budget process </li></ul></ul><ul><li>Consult MD&A for analysis of difference </li></ul>
  71. 71. What Do Variances Mean? <ul><li>Governments focus on service rather than profit </li></ul><ul><ul><li>Excess revenue not necessarily “favorable” </li></ul></ul><ul><ul><li>“Savings” achieved by a reduction in planned services not necessarily “favorable” </li></ul></ul><ul><li>Neutral terminology recommended (e.g., “over” and “under”) to avoid misunderstandings </li></ul>
  72. 72. What is the Schedule of Funding Progress? <ul><li>Comparison over time of actuarial assets and liabilities related to pension plans </li></ul><ul><li>Ratio assets/liabilities = “funded ratio” </li></ul><ul><li>Use covered payroll as point of comparison </li></ul><ul><li>Not presented when “aggregate” method used to determine annual required contribution </li></ul>
  73. 73. Unfunded Actuarial Accrued Liability
  74. 74. What is the Schedule of Employer Contributions? <ul><li>All acceptable actuarial funding methods lead to same point </li></ul><ul><li>Need to compare annual required contribution (ARC) and actual contributions over time </li></ul><ul><li>Full funding = pattern of 100% funding of ARC </li></ul>
  75. 75. What is the Modified Approach? <ul><li>Infrastructure normally depreciated like other capital assets </li></ul><ul><li>Option not to depreciate infrastructure if certain conditions met: </li></ul><ul><ul><li>Up-to-date inventory of infrastructure </li></ul></ul><ul><ul><li>Regular condition assessments </li></ul></ul><ul><ul><li>Annual estimate of cost to maintain at level determined and disclosed by government </li></ul></ul><ul><ul><li>Document maintenance level </li></ul></ul>
  76. 76. What Needs to Be Reported for Modified Approach? <ul><li>Results of 3 most recent condition assessments </li></ul><ul><li>Annual amount estimated to maintain at predetermined condition level (past 5 years) </li></ul><ul><li>Actual expense to maintain at predetermined condition level (past 5 years) </li></ul>
  77. 77. Summary of Changes
  78. 78. Summary of Changes (cont.)
  79. 79. Summary of Changes (cont.)
  80. 80. Summary of Changes (cont.)
  81. 81. Summary of Changes (cont.)
  82. 82. Summary of Changes (cont.)
  83. 83. Summary of Changes (cont.)
  84. 84. Summary of Changes (cont.)
  85. 85. Summary of Changes (cont.)
  86. 86. Summary of Changes (cont.)
  87. 87. Summary of Changes (cont.)