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Elements of a
Comprehensive Annual
  Financial Report and
    Common Mistakes
     2013 TASBO Annual
            Conference
      February 21, 2013
About Your Presenters

• Ann Westbrooks, CPA, RTSBA

• Spring Independent School District
   – Assistant Superintendent of Finance

• Licensed CPA in the State of Texas

• Seven years of school district accounting
  experience
2
About Your Presenters

• Lupe Garcia, CPA
• Whitley Penn, LLP
   – Assurance and Advisory Services | Manager
• Licensed CPA in the State of Texas
• Six years experience performing audits and other
  engagements for counties, cities, school districts,
  and other special-purpose governments


3
Generally Accepted Accounting Principles
(GAAP)

• GAAP provides criteria for whether financial
  reports are fairly presented
• Minimum standard of acceptable financial
  reporting for state and local governments
   – Basic financial statements
   – Note disclosures
   – Certain required supplementary information
     (RSI)
• GAAP encourages presentation of a CAFR

4
Three Basic Sections of a CAFR




5
Introductory Section

• Designed to provide background and context that
  users need to fully profit from information provided
  in the financial section
• Not included within the scope of the audit, but…
• What you will find in this section:
   – Certificate of Achievement for Excellence in
      Financial Reporting (GFOA, ASBO, etc.)
   – List of Principal Officials
   – Organizational Chart
   – Letter of Transmittal
6
Financial Section

• Provides the following information (in this order):
   – Independent Auditor’s Report
   – MD&A
   – Basic Financial Statements (including the
     notes)
   – RSI (other than MD&A)
   – Combining and individual fund presentation
     and supplementary information

7
Independent Auditor’s Report

• Provides assurance that the financial statements
  are reliable
• Opines on opinion units
   – Governmental activities, business-type
     activities, major governmental funds, major
     enterprise funds, all other funds/discretely
     presented component units
• In-relation-to Opinions
• No opinion: introductory and statistical sections

8
Management’s Discussion and Analysis
(MD&A)

• Provide users with a narrative introduction,
  overview and analysis of the basic financial
  statements
• The concept of MD&A originated in the private
  sector, the SEC required MD&A in connection
  with the financial reports of publicly traded
  companies
• GAAP indentifies specific topics that should be
  addressed in MD&A; additional topics not on this
  list should not be addressed in MD&A
9
Contents of MD&A




10
Basic Financial Statements

• Core of CAFR’s financial section and has three
  components:
   – Government-wide financial statements
        • Presented using the economic resources measurement
          focus and accrual basis of accounting
     – Fund financial statements
        • Presented using the current financial resources
          measurement focus and modified accrual basis of
          accounting (governmental funds only)
     – Notes to the financial statements
11
Financial Section

• RSI (other than MD&A)
   – Budgetary comparisons
   – Trend data on infrastructure condition and
     maintenance (only if modified approach is used to
     account for infrastructure)
   – Trend data on the funding of pension and other
     postemployment benefits (OPEB)
   – Revenue and claims development trend data for
     public-entity risk pools


12
Financial Section

• Combining and individual fund presentation and
  other supplementary information
   – CAFR should include a combining statement to
     support each column in the basic financial
     statements that aggregates data from more than
     one fund
   – Supplementary information not required by GAAP
     but needed to comply with the TEA’s reporting
     requirements:
      • Schedule of Delinquent Taxes Receivable
      • Indirect Cost Computation Schedule
13
Statistical Section




14
Statistical Section




15
Common Errors – Introductory Section

• Cover
   – Districts should indicate on the cover the state
     in which they are located
• Transmittal letter
   – Should be dated no earlier than the date of the
     report of independent auditors




16
Common Errors – Introductory Section

• Table of contents
   – The titles of the statements and schedules in the
     report should agree to those listed in the Table of
     Contents
• MD&A
   – Amounts discussed should agree to those presented in
     the financial statements
   – Discussion should explain the underlying reasons for
     significant changes rather than focusing solely on the
     size of the change
   – Careful on use of terminology (i.e. expenses vs.
     expenditures; net assets vs. fund balance)
17
Common Errors – Basic Financial Statements

• All basic financial statements
   – Each of the statements should include a reference to the
      notes
   – Nonmajor governmental funds should be used rather than
      other governmental funds
• Statement of activities
   – Except for interest and unallocated depreciation, expenses
      related to governmental activities should be classified by
      function rather than by object of expenditure (ex. Function
      81)
   – Expenditures associated with the issuance of debt should
      not be included
   – Capital assets should be disclosed by major asset class (i.e.
      capital leases)
18
Common Errors – Basic Financial Statements

• Statement of net assets
   – Unearned revenue should be used and not
     deferred revenue
• Governmental balance sheet and statement of
  revenues, expenditures, and changes in fund balance
   – Governmental funds that report more than 10% of
     the total governmental funds assets, liabilities,
     revenues, or expenditures and more than 5% of
     the combined total of governmental and
     enterprise funds for the same element, have to be
     reported as a major fund

19
Common Errors – Basic Financial Statements

• Proprietary fund financial statements
   – If the district has no debt related to capital
     assets, the district should use the caption: Net
     Assets, Invested in Capital Assets




20
Common Errors – Basic Financial Statements

• Notes to the financial statements
   – Narrative explanations of combining and
     individual fund statements and schedules
     describing the nature and purpose of the funds
     should be included
   – Additions to long-term debt disclosed in the notes
     should agree to the Proceeds from the Issuance of
     Debt presented in the fund financial statements
   – Depreciation expense charged by function should
     agree to current year increases to accumulated
     depreciation
21
Common Errors – Basic Financial Statements

• Notes to the financial statements
  – Specify action to establish, modify, or rescind
    fund balance commitments; disclose body or
    official authorized to assign fund balance
    (GASBS No. 54)
  – Disclose increases and decreases to
    compensated absences rather than the net
    change; also, disclose amount due within one
    year (even if an estimate must be made)
22
Common Errors – Other Supplementary Info.

• Schedule of delinquent taxes receivable (Exhibit J-
  1)
   – Should agree to property tax receivable per
     governmental funds balance sheet (Exhibit C-1)




23
Common Errors – Statistical Section

• Principal taxpayers, principal employers,
  demographic and economic information
   – If the information for the period nine or ten year
     prior to the current period is not available, then
     include data from the earliest year from which
     information is available and disclose the reason
     for the exception
• Property tax levies and collections
   – Total tax collections as a percentage of the
     annual levy should not exceed 100%
24
Common Errors – Statistical Section

• Changes in fund balances – governmental funds
   – Debt service as a % of noncapital expenditures – use
     the amount of capital outlay from the reconciliation
     of government-wide financials to fund financials;
     also, bond issuance costs and fees should not be
     included (principal and interest only)
• Outstanding debt by type
   – Should only include long-term debt instruments, not
     all long-term liabilities (i.e. compensated absences)


25
Contact Us!
   Ann Westbrooks, CPA,
                 RTSBA
 wwestbro@springisd.org

         Lupe Garcia, CPA
lupe.garcia@whitleypenn.
                     com

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Elements of a CAFR and Common Mistakes

  • 1. Elements of a Comprehensive Annual Financial Report and Common Mistakes 2013 TASBO Annual Conference February 21, 2013
  • 2. About Your Presenters • Ann Westbrooks, CPA, RTSBA • Spring Independent School District – Assistant Superintendent of Finance • Licensed CPA in the State of Texas • Seven years of school district accounting experience 2
  • 3. About Your Presenters • Lupe Garcia, CPA • Whitley Penn, LLP – Assurance and Advisory Services | Manager • Licensed CPA in the State of Texas • Six years experience performing audits and other engagements for counties, cities, school districts, and other special-purpose governments 3
  • 4. Generally Accepted Accounting Principles (GAAP) • GAAP provides criteria for whether financial reports are fairly presented • Minimum standard of acceptable financial reporting for state and local governments – Basic financial statements – Note disclosures – Certain required supplementary information (RSI) • GAAP encourages presentation of a CAFR 4
  • 5. Three Basic Sections of a CAFR 5
  • 6. Introductory Section • Designed to provide background and context that users need to fully profit from information provided in the financial section • Not included within the scope of the audit, but… • What you will find in this section: – Certificate of Achievement for Excellence in Financial Reporting (GFOA, ASBO, etc.) – List of Principal Officials – Organizational Chart – Letter of Transmittal 6
  • 7. Financial Section • Provides the following information (in this order): – Independent Auditor’s Report – MD&A – Basic Financial Statements (including the notes) – RSI (other than MD&A) – Combining and individual fund presentation and supplementary information 7
  • 8. Independent Auditor’s Report • Provides assurance that the financial statements are reliable • Opines on opinion units – Governmental activities, business-type activities, major governmental funds, major enterprise funds, all other funds/discretely presented component units • In-relation-to Opinions • No opinion: introductory and statistical sections 8
  • 9. Management’s Discussion and Analysis (MD&A) • Provide users with a narrative introduction, overview and analysis of the basic financial statements • The concept of MD&A originated in the private sector, the SEC required MD&A in connection with the financial reports of publicly traded companies • GAAP indentifies specific topics that should be addressed in MD&A; additional topics not on this list should not be addressed in MD&A 9
  • 11. Basic Financial Statements • Core of CAFR’s financial section and has three components: – Government-wide financial statements • Presented using the economic resources measurement focus and accrual basis of accounting – Fund financial statements • Presented using the current financial resources measurement focus and modified accrual basis of accounting (governmental funds only) – Notes to the financial statements 11
  • 12. Financial Section • RSI (other than MD&A) – Budgetary comparisons – Trend data on infrastructure condition and maintenance (only if modified approach is used to account for infrastructure) – Trend data on the funding of pension and other postemployment benefits (OPEB) – Revenue and claims development trend data for public-entity risk pools 12
  • 13. Financial Section • Combining and individual fund presentation and other supplementary information – CAFR should include a combining statement to support each column in the basic financial statements that aggregates data from more than one fund – Supplementary information not required by GAAP but needed to comply with the TEA’s reporting requirements: • Schedule of Delinquent Taxes Receivable • Indirect Cost Computation Schedule 13
  • 16. Common Errors – Introductory Section • Cover – Districts should indicate on the cover the state in which they are located • Transmittal letter – Should be dated no earlier than the date of the report of independent auditors 16
  • 17. Common Errors – Introductory Section • Table of contents – The titles of the statements and schedules in the report should agree to those listed in the Table of Contents • MD&A – Amounts discussed should agree to those presented in the financial statements – Discussion should explain the underlying reasons for significant changes rather than focusing solely on the size of the change – Careful on use of terminology (i.e. expenses vs. expenditures; net assets vs. fund balance) 17
  • 18. Common Errors – Basic Financial Statements • All basic financial statements – Each of the statements should include a reference to the notes – Nonmajor governmental funds should be used rather than other governmental funds • Statement of activities – Except for interest and unallocated depreciation, expenses related to governmental activities should be classified by function rather than by object of expenditure (ex. Function 81) – Expenditures associated with the issuance of debt should not be included – Capital assets should be disclosed by major asset class (i.e. capital leases) 18
  • 19. Common Errors – Basic Financial Statements • Statement of net assets – Unearned revenue should be used and not deferred revenue • Governmental balance sheet and statement of revenues, expenditures, and changes in fund balance – Governmental funds that report more than 10% of the total governmental funds assets, liabilities, revenues, or expenditures and more than 5% of the combined total of governmental and enterprise funds for the same element, have to be reported as a major fund 19
  • 20. Common Errors – Basic Financial Statements • Proprietary fund financial statements – If the district has no debt related to capital assets, the district should use the caption: Net Assets, Invested in Capital Assets 20
  • 21. Common Errors – Basic Financial Statements • Notes to the financial statements – Narrative explanations of combining and individual fund statements and schedules describing the nature and purpose of the funds should be included – Additions to long-term debt disclosed in the notes should agree to the Proceeds from the Issuance of Debt presented in the fund financial statements – Depreciation expense charged by function should agree to current year increases to accumulated depreciation 21
  • 22. Common Errors – Basic Financial Statements • Notes to the financial statements – Specify action to establish, modify, or rescind fund balance commitments; disclose body or official authorized to assign fund balance (GASBS No. 54) – Disclose increases and decreases to compensated absences rather than the net change; also, disclose amount due within one year (even if an estimate must be made) 22
  • 23. Common Errors – Other Supplementary Info. • Schedule of delinquent taxes receivable (Exhibit J- 1) – Should agree to property tax receivable per governmental funds balance sheet (Exhibit C-1) 23
  • 24. Common Errors – Statistical Section • Principal taxpayers, principal employers, demographic and economic information – If the information for the period nine or ten year prior to the current period is not available, then include data from the earliest year from which information is available and disclose the reason for the exception • Property tax levies and collections – Total tax collections as a percentage of the annual levy should not exceed 100% 24
  • 25. Common Errors – Statistical Section • Changes in fund balances – governmental funds – Debt service as a % of noncapital expenditures – use the amount of capital outlay from the reconciliation of government-wide financials to fund financials; also, bond issuance costs and fees should not be included (principal and interest only) • Outstanding debt by type – Should only include long-term debt instruments, not all long-term liabilities (i.e. compensated absences) 25
  • 26. Contact Us! Ann Westbrooks, CPA, RTSBA wwestbro@springisd.org Lupe Garcia, CPA lupe.garcia@whitleypenn. com