Plain and Simple: The GFOA’s Small Government Financial ... · " Applying OCBOA in State and...

Jennifer C. Johns, City of Miamisburg, Ohio Bob Scott, City of Carrollton, Texas Stephen Blann, Rehmann

Moderator:

Speakers:

Sunday, May 31, 2015 2:40 – 3:30 1 CPE

Plain and Simple: The GFOA’s Small Government Financial Reporting Program

Session Overview

1.  Background and environment

2.  Current guidance

3.  New GFOA recognition program

4.  Application of the modified cash basis

5.  Report format and content

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P A R T 1

Background and environment 3

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GASB research

�  2008 Research Report by the Government Accounting Standards Board (GASB) ¡  State and local governments = 88,000

÷ Largest 30,000 governments ¢  98% of all state and local revenue from the 90,000 units of state

and local governments is accounted for by the largest 30,000 units

¢  33 percent do not follow generally accepted accounting principles (GAAP)

÷ Remaining 58,000 governments ¢  Overwhelming number probably do not follow GAAP

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Why not GAAP?

�  The government may not be able to bear the additional cost of preparing GAAP financial statements

�  The government’s staff may not possess the skill, knowledge, or experience (SKE) necessary to prepare GAAP financial statements

�  The government may view GAAP reporting as less useful for budgetary and managerial decisions

�  Regulatory agencies may mandate that reports be prepared on a basis other than GAAP

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GAAP alternatives

�  Cash basis �  Modified cash basis �  Regulatory basis

¡  If states’ required regulatory basis coincided with GFOA requirements, we can strive for uniformity.

¡  Few states have a regulatory basis and even fewer track or keep reports of their local governments ÷ Uniformity may no longer be a viable option for financial reporting

on a basis other than GAAP.

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Inherent limitations of GAAP alternatives

�  Could lead to less informed decisions ¡  Information not provided on the full cost of services ¡  Some assets and liabilities not reported

�  Lack of uniformity may create confusion among users

�  More prone to manipulation �  May lack key disclosures or information desired by

certain users ¡  Rating agencies, creditors, investors, taxpayers, and officials

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When is the use of a non--GAAP alternative appropriate?

�  There is no legal requirement for GAAP reporting �  Staff does not possess the prerequisite SKE �  The cost of producing GAAP financial statements would

likely exceed the benefits �  Internal and external users understand the alternative

financial reporting framework and its limitations, but still find it relevant for their needs.

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P A R T 2

Current guidance 9

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Cash basis and modified cash basis

�  No authoritative accounting and financial reporting standards

�  Guidance from the American Institute of Certified Public Accountants (AICPA) ¡  Authoritative auditing guidance

÷ AU-C Section 800 – Special Purpose Frameworks ¡  Non-authoritative Practice Aid

÷ Applying OCBOA in State and Local Government Financial Statements (www.cpa2biz.com, product code APAOCBO12P).

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AICPA guidance

�  GAAP alternatives = “Special purpose frameworks” ¡  Financial reporting frameworks other than GAAP are

identified in AICPA AU-C Section 800 as one of the following bases:

¡  Cash basis ¡  Tax basis ¡  Regulatory basis ¡  Other basis ¡  Contractual basis

Commonly referred to as “Other Comprehensive Bases of Accounting” (OCBOA)

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Definition of “cash basis”

�  A basis of accounting that the entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support.

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P A R T 3

New GFOA recognition Program

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Award Program for Small Government Cash Basis Reports

�  Established by the GFOA Executive Board in 2012 �  Due to the number of small governments not doing

GAAP, the Board decided it would be beneficial to: ¡  Meet governments where they were and encourage them to get

incrementally better ¡  Create a format that met AICPA recommendation and

positioned growing governments to one day report on a GAAP basis.

¡  Encourage uniformity across states

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Goal of the new program

�  To help small governments that, for practical considerations, do not prepare financial statements in conformity with GAAP improve the quality of their annual financial reports.

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Objectives of the new program

�  Provide a uniform set of nationally recognized guidelines for governments electing to report on a basis of accounting other than GAAP.

�  Improve the quality and consistency of small government annual financial reports across the country .

�  Provide a stepping stone to GAAP financial reporting for small governments interested in moving in that direction.

�  Encourage small governments to take ownership and pride in their financial reports.

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How the program works

�  Provides guidelines to help standardize the format and content of annual financial reports prepared on a modified cash basis ¡  Detailed checklists ¡  Sample report

�  Encourages governments to follow those guidelines by offering public recognition to those that successfully do so

�  Assists governments to implement the guidelines by providing technical materials and training.

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vs. Certificate of Achievement

�  The Award Program for Small Government Cash Basis Reports ¡  Encourages compliance with basic norms of sound financial

reporting in situations where GAAP financial reporting is not practical.

�  The Certificate of Achievement Program ¡  Recognizes outstanding achievement in financial reporting, which

presupposes financial reporting in conformity with GAAP . ÷  For some governments, participation in the Award Program for Small

Government Cash Basis Reports may be a first step toward GAAP financial reporting and participation in the Certificate of Achievement Program.

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Which governments can participate?

�  Governments of any type ¡  General purpose ¡  Special purpose

�  Primary government revenues ≤ $25 million either for: ¡  Current year, or ¡  Average of the five most recent years

�  No requirement for GAAP financial reporting �  No GAAP financial report issued in the past 5 years

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Overall report: SGAFR (v. CAFR)

�  Comparison ¡  Certificate of Achievement Program

÷  Comprehensive annual financial report (CAFR) ¡  Award Program for Small Government Cash Basis Reports

÷  Annual financial report �  Similarities

¡  Both contain introductory section ¡  Both contain financial section

�  Differences ¡  CAFR contains statistical section ¡  SGAFR requires only selected 5-year trend tables ¡  CAFR contains both an MD&A and transmittal letter ¡  SGAFR requires only a transmittal letter (with certain MD&A type info

included)

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Submissions and judging

�  Reports reviewed by a combination of ¡  Volunteer reviewers ¡  GFOA professional staff

�  6-month submission deadline ¡  Extensions available for extraneous circumstances

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Checklists and sample SGAFR

�  Available on GFOA website (www.gfoa.org/cashbasisaward) ¡  Checklists

÷  General purpose local governments ÷  School districts ÷  Stand-alone business-type activities

¡  Sample SGAFR

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Program fees

�  Based on total revenues

�  Nonmembers that submit for the first time receive a GFOA membership that allows submission at member rate.

Total Revenues GFOA Member Fee Nonmember Fee Under $1 million $290 $580 $1-10 million $370 $740 Over $10 million $435 $870

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What program participants receive

�  Results of detailed review ¡  Specific comments and suggestions for improvement

÷  Provided within 6 months to allow implement of comments and suggestions in the subsequent year’s report

¡  Grade assigned to each section of the report

�  GFOA professional staff available to answer questions �  Award-winning reports:

¡  Plaque and press release ¡  Complete list of all award-winning reports maintained on the GFOA’s

website ¡  First-time winners of the award announced in the GFOA Newsletter.

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P A R T 4

Application of the modified cash basis

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Cash v. modified cash

�  “Plain vanilla” cash basis ¡  Strictly limited to

÷ Cash (and cash equivalents) ÷ Changes in cash (and cash equivalents)

�  Modified cash basis ¡  Certain modifications that bring reporting closer to GAAP ¡  Still limited to underlying transactions and events that involve

cash (or cash equivalents)

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GFOA’s version of modified cash

�  Focus on cash (and cash equivalents) ¡  Basic rule

÷  Statement of position ¢  Report only cash (and cash equivalents)

÷  Statement of resource flows ¢  Report only transactions and events that involve the receipt or

disbursement of cash (or cash equivalents) ¡  Specific exceptions (modifications)

÷  Report interfund receivables and payables ÷  Report assets that normally convert to cash (or cash equivalents)

¢  Certificates of deposit, marketable investments, loans receivable ÷  Report liabilities for cash (or cash equivalents)

¢  Held on behalf of others ¢  Held in escrow ¢  Received in advance of being earned or meeting eligibility requirements

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GFOA’s version of modified cash (cont.)

�  Items not reported ¡  Capital assets or long-term debt that arise from transactions or

events involving the receipt or disbursement of cash or cash equivalents

¡  Deferred outflows of resources or deferred inflows of resources ¡  Prepaid items ¡  Supplies inventories ¡  Accrued assets and accrued liabilities ¡  Other assets or liabilities that do not arise in connection with

transactions or events involving the receipt or disbursement of cash (or cash equivalents)

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P A R T 5

Format and content 29

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Preliminary note

�  Required supplementary information (RSI) – beware say the clarity standards! ¡  By definition, RSI is applicable solely to GAAP financial

statements ÷  If information presented as RSI in GAAP financial statements is to

be included, it must be presented in some other manner ¢  Management’s discussion and analysis (MD&A) should be

incorporated into the letter of transmittal ¢  Budgetary comparisons for the general fund and major special

revenue funds with annual (or biennial) appropriated budgets

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Introductory section

�  Letter of transmittal �  Organization chart �  List of principal officials

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Letter of transmittal – current recommendation

�  Start with MD&A �  Rename: Letter of

Transmittal �  Add transmittal letter

discussion topics �  Keep MD&A topics as

they are.

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A cash basis report’s MD&A page

Organizational chart

�  Formatting left to management’s discretion

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List of principal officials

�  List of officials in place either ¡  At the time the report was

issued ¡  During the fiscal year of the

report (if different). �  Formatting left to

management’s discretion.

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Basic financial statements

�  Presentation requirements ¡  GAAP presentation requirements apply to the degree consistent with

modified cash accounting ÷  Like GAAP – both government-wide and fund financial statements

•  Sometimes possible to combine into a single statement ÷  Unlike GAAP – use of the same basis of accounting in both

�  Present budgetary comparisons as basic financial statements (RSI not an option) ¡  General fund ¡  Major special revenue funds with annual (or biennial) appropriated

budgets

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Illustrative budgetary comparisons 36

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Note disclosure requirements

�  Similar to GAAP if relevant to any of the items recognized under the modified cash basis. ¡  Other note disclosures as considered necessary or required by

program guidelines.

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Note disclosure specifics

�  Explanation of modified cash basis �  No requirement to disclose capital assets �  Award Program policy requires the disclosure of long-

term liabilities ¡  Debt, compensated absences, claims and judgments, and pension-

related liabilities, when available ÷ List of debt, when it was issued and for what purpose. ÷ Changes from the previous year’s balance (increases and decreases). ÷ Debt service payments for the next five years and in five-year

increments thereafter. �  Otherwise, GAAP disclosures, as applicable to the

modified cash basis

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Other financial section information: Program requirements

�  Combining and individual fund financial statements and schedules ¡  Including budgetary comparisons presented at the legal level

of budgetary control for all individual governmental funds with legally adopted annual (or biennial) budgets.

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Other financial section information: Program requirements (cont.)

�  Schedules of five-year trend data, as applicable: ¡  Net position – government-wide financial statements –

modified cash basis, ¡  Changes in net position – government-wide financial

statements – modified cash basis, ¡  Fund balances – governmental funds – modified cash basis, ¡  Revenues, expenditures, and changes in fund

balances – governmental funds – modified cash basis, and ¡  Outstanding debt by type

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Trend information example 41

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