Course
Description
Syllabus
Registration Form
Directions to Class
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New
Financial Reporting Model
By Mark D. Abrahams, CPA
The
Governmental Accounting Standards Board (GASB) has issued GASB Statement
No. 34, Basic Statements - and Management's Discussion and Analysis
- for State and Local Governments, that will dramatically change financial
reporting for all state and local governments including Massachusetts'
cities and towns. The new financial reporting model will require the
preparation of two new government-wide financial statements that use
the accrual basis of accounting while maintaining the concept of fund-based
statements. For the first time, governmental financial reports will
have information about the full cost of providing services. Readers
of governmental financial statements will have more and easier to understand
information about the government. The new reporting model retains the
current year fiscal accountability of the current model based
on funds and adds operational accountability that focuses on
long-term assets and liabilities and the change in net assets
from one year to another.
The
major impact on Massachusetts' municipalities is the inclusion of capital
assets on the financial statements. The capital assets to be reported
will include not only the items now (or should be) reported in the general
fixed assets account group (i.e., land, buildings, equipment, improvements
other than buildings), but also infrastructure assets (e.g., roads and
sidewalks), whose reporting is optional under current GAAP. Capital
assets will be brought onto the face of the financial statements (removed
from the account group). Capital assets will be depreciated thereby
impacting the results of operations. Capital assets, net of accumulated
depreciation and debt, will affect the financial position or net assets
of the government.
The
original GASB position to report infrastructure on an historical cost
basis has been modified to include higher level infrastructure accounting,
25 retroactive years, and options for preservation or condition
assessment disclosures with the later more closely aligned with
management systems. The infrastructure implementation date has also
been deferred for four years after the reporting model implementation
date. Smaller governments (revenues less than $10 million) do not need
to report infrastructure retroactively.
The
preliminary impact of this change on financial reporting follows. Two
new government-wide accrual statements will be prepared to demonstrate
operational accountability. These financial statements encompass both
governmental and business-type activities (i.e. governmental and proprietary
funds, but not fiduciary funds), as well as nonfiduciary component units.
-
Statement
of Net Assets.
The basic government--wide statement of position will be the statement
of net assets. The statement will use a net assets format (i.e., assets
- liabilities = net assets) rather than the more traditional balance
sheet format (i.e., assets = liabilities + equity). The "governmental
activities" column will report all assets and liabilities related
to governmen-tal fund activities, including assets and liabili-ties
currently (or should be) reported in the two account groups.
-
Statement
of Activities. The other new basic government-wide accrual- financial
statement is the statement of activities. This is the operating statement.
The statement will use a net cost format. The statement first reports
the total cost of a government's various functions or programs from
all funding sources such as Public Works or Education. The statement
then shows how a portion of the cost are financed by charges for services
or by related grants and contri-butions. The difference between these
two ele-ments is then reported as the net cost that must be financed
through a government's own resources (e.g., taxes and non-program-related
revenue).
Fund-based
statements will continue to be presented to demonstrate fiscal accountability.
Governmental funds will continue to be reported on the modified
accrual basis for the general, special revenue, capital projects, and
debt service funds. Enterprise funds will be reported on the
accrual basis as "Business-type Activities" that meet one of three specific
criteria with internal service funds consolidated into a summary
column. Public purpose trust funds (i.e. stabilization and conservation
trust funds) will be reclassified to special revenue funds and be reported
on the modified accrual basis. A new type of fiduciary fund, the private
purpose trust fund, will be established (i.e. public employee retirement
systems) to report resources not available to support government programs.
Public purpose trust funds will be reclassified as permanent funds
and reported as governmental funds thus replacing both the expendable
and nonexpendable trust funds found in current practice. Governmental
funds reported on the modified accrual basis in the fund-based statements
would be reconciled to the government-wide accrual statements on the
face of the fund-based statements. The Department of Revenue will address
specific reclassifications. The use of fiduciary funds will be
limited to reporting resources that are not available to support government
programs (i.e. agency and pension trust funds).
Any
activity that charges a user fee may be reported as an enterprise
fund. Activities must be reported as enterprise funds if
(1) user fee revenues are restricted to pay debt service, (2) the government
adopts a law to recover costs with fees, or (3) management sets a policy
to recover operating and capital (depreciation or debt service)
costs through fees. The difference between the new and old enterprise
fund guidance is (1) policy - if it is the government's policy to recover
costs through fees, then the activity is an enterprise fund (2) debt
service is now included in the definition of capital cost recovery and
(3) capital assets will now be an integral part of the financial statements.
The
focus of fund reporting for the fund-based statements will be on major
individual funds rather than on fund types, with nonmajor funds
being reported in the aggregate for each category (i.e. governmental
and proprietary). For this purpose, the general fund always will be
considered to be a major fund. Other funds are "major" if the fund has
at least 10 percent of the total assets, liabilities, revenues, or expenditures/expense
of all funds within its category (i.e., governmental or enterprise)
and the fund has at least 5 percent of the total of governmental
and enterprise funds combined. These criteria are designed to serve
as minimum standards. Governments would be free to classify other
funds that did not meet these criteria as major funds if they believe
presenting those funds in this manner would be of benefit to financial
statement users. A reconciliation between government-wide accrual and
fund-based modified accrual governmental funds financial statements
on the face of the fund-based statements will also be required.
A Budget
Comparison Statement will be reported as Required Supplemental Reporting
with a reconciliation between the budgetary basis on the Budget Comparison
and the government-wide accrual basis where the two bases differ on
the face of the Budget Comparison will also be required. A Management
Discussion and Analysis Section (MD&A) will also be prepared using
narratives, charts and graphs to discuss the highlights of the financial
statements, both government-wide and fund perspectives, and what has
changed over the prior fiscal year. Notes will continue to be
an integral part of the financial statements.
The
new financial reporting model and infrastructure implementation dates
(financial statements as of) will be as follows. For communities with
total revenues (as of June 30, 1999):
|
Total Revenues |
Financial
Reporting Model |
Infrastructure
Reporting |
Greater than
$100 million |
June 30, 2002 |
June 30, 2006,
retroactive 25 years |
Between $10
and $99 million |
June 30, 2003 |
June 30, 2007,
retroactive 25 years |
Less than $10
million |
June 20, 2004 |
Prospectively
from July 1, 1999 |
The Massachusetts
Department of Revenue has projected that 25 Massachusetts communities
will be required to implement the new model for FY 2002 statements, 187
communities for FY 2003 including all regional school districts, and 137
communities for FY 2004. The Department of Revenue will also be issuing
implementation guidance in the forthcoming months.
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