basic overview of the cafr

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Basic Overview of the CAFR

By Andrew Laflin, CPACliftonLarsonAllen LLP

2012 School of Government Finance

©2012 CliftonLarsonAllen LLP2

Time to Dissect the CAFR!!!


Learning Objectives

• Learn about what a CAFR is and what entities prepare a CAFR and why

• Identify the components of the Comprehensive Annual Financial Report (CAFR).

• Gain a deeper understanding of what information is presented within each CAFR component


What is a CAFR?

• An annual financial report that is more “comprehensive” than financial statements required by GAAP.

• CAFR = Comprehensive Annual Financial Report


Must Local Governments Prepare a CAFR?

• Only basic financial statements are required for a GAAP presentation

• Many government finance officers prepare a CAFR as a result of their desire to participate in the GFOA's program, the Certificate of Achievement for Excellence in Financial Reporting– Among other requirements, CAFR must be postmarked or

emailed no later than six months after the end of the government's fiscal year to be eligible to participate in the program

• GFOA checklist: http://www.gfoa.org/downloads/GENERALPURPOSECHECKLIST2011.pdf


CAFR COMPONENTS


Comprehensive Annual Financial Report

Introductory Section

Financial Section

Statistical Section

Other Reports*

* Added for Single Audit, if necessary.


Introductory Section

1. CAFR Cover– Contain the title “Comprehensive Annual Financial

Report”– Show the name of the government and the state in which

it is located– Show the fiscal period covered by the report

2. Title Page– Include same information as presented on the CAFR

cover as well as the name of the department responsible for preparing the report


Introductory Section, cont.

3. Table of Contents– Be clearly divided into at least three sections—the

introductory, financial, and statistical sections– Clearly distinguish the contents of the financial section

between (i) the basic financial statements and notes, (ii) RSI, and (iii) other contents of that section

– Identify each financial statement by its full title and provide a page reference for all contents

4. Certificate of Achievement for Excellence in Financial Reporting (for prior year)


Introductory Section, cont.

5. List of Principal Officials6. Letter of Transmittal

– Formal transmittal of the CAFR– Profile of the government– Information useful in assessing the government's

financial condition (don’t replicate MD&A)– Awards and acknowledgements

7. Organizational Chart– May be combined w/list of principals– Reflect various functions within the local government


Financial Section

• Consists of the following sections:– Independent Auditor’s Report (IAR)– Management’s Discussion & Analysis (MD&A)– Basic Financial Statements (includes notes to the f/s)– Required Supplementary Information (other than MD&A)– Combining statements and individual fund statements and

schedules


Independent Auditor’s Report

• Presents the independent auditor's opinion on whether the opinion units in the basic financial statements are presented fairly in conformity with GAAP

• Auditor is required to give an opinion on the basic financial statements at a minimum

• Opinion can either be unqualified, qualified, disclaimer, or adverse


Management’s Discussion & Analysis

• Brief Discussion of the Basic Financial Statements: include brief discussion of how the gov’t wide and fund financial statements relate to each other and differ in the information they provide

• Condensed Comparative Financial Information: info derived from, but not identical to, the information presented in the gov’t-wide f/s

• Analysis of the Govt’s Overall Financial Position and Results of Operations: assess whether the government's financial position has improved or deteriorated over the past year


MD&A, continued

• Analysis of Balances and Transactions of Individual Funds: intended to help users understand significant changes in individual fund balances, including their effect on future transactions

• Analysis of Significant General Fund Budgetary Variations: focuses on variances between original and final general fund budget amounts and variances between final budget and actual results


MD&A, continued

• Description of Significant Capital Asset and Long-term Debt Activity: includes additions to and sales of capital assets, new debt issuances and retirements, and changes in debt ratings and available credit that have occurred during the year

• Discussion of Currently Known Facts, Decisions, or Conditions: intended to help users assess future operations of the government


MD&A, continued

• Common errors:– Not updating figures presented in drafted MD&As for final

financial statement figures– Discussing reasons for increases or decreases in

government-wide net assets using current financial resource flows information

– Including something in MD&A that is not also discussed in the notes

– Not providing three years' worth of data and analysis in MD&A when accompanying financial statements are comparative


Basic Financial Statements & Notes

• Government-wide statement of net assets and the statement of activities should display information about the reporting government as a whole (see GASBS 14, The Financial Reporting Entity)

• Include primary government and component units; exclude fiduciary funds

• Separately report governmental and business-type activities


Government-wide Statements

• Report capital assets (include depreciation expense)• Report general long term liabilities• Report revenues and expenses on accrual basis• Eliminate interfund balances and activities• Convert most internal service funds to governmental

activities• Reclassify expenses by function


Government-wide Statements

Item Fund BalanceGovernmental Funds

Net Assets Proprietary Funds

Capital asset acquisition Decrease No effect

Depreciation No effect Decrease

Issuance of long-term debt Increase No effect

Payment of long-term debt Decrease No effect

Key Differences Resulting from the Measurement Focus of Accounting

American Institute of Certified Public Accountants, Inc. Foundations in Governmental Accounting. Durham, North Carolina: 2012. Print


Reconciliation Process

Fund Statements• Balance Sheet –

Governmental Funds

Government-wide Statements• Statement of Net Assets


Terminology Differences

Fund Statements• Fund Balance

1) Nonspendable2) Restricted3) Committed4) Assigned5) Unassigned

Government-wide Statements• Net Assets

1) Invested in Capital Assets, Net of Related Debt2) Restricted3) Unrestricted


Invested in Capital Assets, Net of Related Debt

Capital Assets, not depreciated $ x,xxx,xxx

Capital Assets, being depreciated – net xx,xxx,xxx

Less: Unamortized bond premium (xx,xxx)

Less: Notes payable (xx,xxx)

Less: Bonds payable (xxx,xxx)

Plus: Deferred charges xxx,xxx

Plus: Unamortized bond issue costs xxx,xxx

Sub-total xx,xxx,xxx

Add: Unspent bond proceeds xxx,xxx

Total $ xx,xxx,xxx


Reconciliation Process

Agree the Balance Sheet – Governmental Funds to the Statement of Net Assets – Governmental Activities.

What are common reconciling items?

Capital Assets

Long-term Debt

Accrued Interest

Pension Asset / Liability

Compensated Absences

Internal Service Funds

OPEB


Reconciliation Process (continued)

Item Fund BalanceGovernmental Funds

Net Assets Government-wide

Capital assets No effect Increase

Pension asset No effect Increase

Accrued interest No effect DecreaseInternal service funds No effect IncreaseConsolidation of ISF No effect Decrease


Reconciliation Process (continued)Certain liabilities are not due and payable in the current period and, therefore, are not reported in the funds.

Bonds and Notes Payable $ (xx,xxx,xxx)

Less: Deferred Charges on Refunding (to be Amortized over the Life of Debt) xxx,xxx

Less: Deferred Charges on Issuance Cost (to be Amortized over the Life of Debt) xxx,xxx Including: Issuance Premium (to be Amortized as a Decrease in Interest Expense) (xxx,xxx)

Accrued Other Postemployment Benefits (x,xxx,xxx)Accrued Compensated Absences (x,xxx,xxx)Pension Obligation (xxx,xxx)

Net Adjustment to Reduce Fund Balance - Total Governmental Funds to Arrive at Net Assets - Governmental Activities (xx,xxx,xxx)



Fund Statements• Statement of Revenues,

Expenditures and Changes in Fund Balance – Governmental Funds

Government-wide Statements• Statement of Activities



Item Net Change in FBGovernmental Funds

Change Net Assets Government-wide

Capital asset additions Decrease No effect

Depreciation No effect Decrease

Sale of capital assets Increase Increase / Decrease



Item Net Change in FBGovernmental Funds

Change Net Assets Government-wide

Principal repayments Decrease No effectCost of defeasance* No effect IncreaseBond premium No effect DecreaseBond discount No effect Increase

* Assume bond refunding occurred before year end.



• Report the change in the following liabilities:1) OPEB2) Compensated Absences3) Interest Payable4) Pension Expense

• Internal Service Funds


Internal Service Funds (Example)

Operating ActivitiesSales and Charges for Service $ 74,800 Cost of Services Provided 68,000

Operating Income 6,800

Nonoperating Revenues (Expenses)Interest Expense (250)

Change in Net Assets $ 6,550

“How to Prepare Government-wide Financial Statement.” PowerPoint presentation from the Government Finance Officers Association (GFOA). June 28, 2000.



Step 1: Identify External Customer Revenues

Operating RevenuesInternal Customers $ 55,000 External Customers 19,800

Total Revenues $ 74,800



Step 2: Identify Expenses Related to External Customers

Operating ActivitiesRevenues From Customers $74,800 Cost of Services Provided 68,000

Operating Income $ 6,800

Profit MarginRevenues $ 74,800 = 110%Expenses $ 68,000

External Revenues $ 19,800 divide by = $18,000 110%



Step 3: Calculate Internal Profit / Loss Operating Revenues:

Total Internal External Internal $55,000 $ 55,000 External 19,800 19,800

$74,800 $ 55,000 $19,800

Operating Expenses:

Internal $50,000 $ 50,000 External 18,000 18,000

$68,000 $ 50,000 $18,000

Operating Income:

Internal $ 5,000 $ 5,000 External 1,800 1,800 Total $ 6,800 $ 5,000 $ 1,800



Step 4: Allocate Internal Profit / Loss

% of Fuction Participation Profit AllocationFunction A (governmental) 65% $ 5,000 $ 3,250 Function B (governmental) 25% 5,000 1,250 Function C (governmental) 5% 5,000 250 Function D (governmental) 3% 5,000 150 Function E (business-type) 2% 5,000 100

100% $ 5,000


Internal Service Fund (Example)

Step 5: Apply Allocations• Treat as an adjustment of expenses in governmental

and business-type activities• Adjust receivables / payables for business type

activities - Report $100 receivable for interfund

activities in business-type activities- Report $100 payable for interfund activities in governmental activities


Internal Service Fund (Example)

Internal Service Fund Activity

Reflect as Reduction of Report in Eliminate from Functional Gov't Activities Gov't Activities Expenses

Operating Revenues

Internal Customers $ 55,000 $ 55,000

External Customers 19,800 $ 19,800

Total $ 74,800

Operating Expenses

Internal Customers $(50,000) $ (50,000)

External Customers (18,000) $ (18,000)

Total $(68,000)

Operating profit (loss) $ 6,800 $ 1,800 $ 5,000 $ 5,000

Nonoperating

Interest Expense $ (250) $ (250)


Governmental Fund Financial Statements

• Required statements include balance sheet and statement of revenues, expenditures, and changes in fund balances

• Each statement should include a separate column for each major governmental fund and another column for nonmajor governmental funds in the aggregate


Governmental Fund F/S, continued

• Current financial resource flows measurement focus and modified accrual basis of accounting are required

• Reconciliation at the bottom of the statements (or in a separate schedule) is required to summarize the differences between total governmental fund balances/change in total fund balances and net assets/change in net assets of governmental activities


Proprietary Fund Financial Statements

• Required statements are a statement of net assets/equity, a statement of revenues, expenses, and changes in fund net assets, and a statement of cash flows

• Each statement should include separate columns for major enterprise funds and a single aggregated column for internal service funds


Proprietary Fund F/S, continued

• The economic resources flows measurement focus and accrual basis of accounting are required

• Reconciliation at the bottom of the statements (or in a separate schedule) is required to summarize the differences, if any, between total enterprise fund net assets/change in net assets and the same balances for business-type activities in the government-wide financial statements


Fiduciary Fund Financial Statements

• Used to report assets held in a trustee or agency capacity for others and therefore cannot be used to support the government's own programs

• Basic financial statements for fiduciary funds include a statement of fiduciary net assets and a statement of changes in fiduciary net assets


Fiduciary Fund F/S, continued

• Typical examples include pension trust funds and agency funds

• GASBS No. 63, which is effective for financial statements for periods beginning after December 15, 2011, will require fiduciary funds to report net position, not net assets


Notes to the Financial Statements

• More significant notes include:– Summary of significant accounting policies– Deposits and investments– Capital assets– Long-term liabilities– Interfund balances and transfers– Pension & OPEB– Disclosures about fund balances & net assets


Required Supplementary Information (RSI)

• What is RSI?Supporting information that Government Accounting Standards Board (GASB) has concluded is essential for placing basic financial statements and notes to the basic financial statements in an appropriate operational, economic, or historic context (paragraph 2.47)

American Institute of Certified Public Accountants, Inc. Audit and Accounting Guide: State and Local Governments. NewYork: March 2010. Print



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

• Budgetary Comparisons Schedules for the general fund and each major special revenue fund with a legally adopted budget.

Should it be RSI or part of the basic financial statements?


• Schedule of Funding Progress and Schedule of Employer Contributions (GASB No. 25 & 45)

• Modified Approach for Infrastructure Assets (GASB No. 34, as amended)

• Employers Postemployment Benefits Other Than Pension Schedule of Funding Progress (GASB No. 45)



Budgetary Comparison Schedule

Budgetary Basis

GAAP Basis

Accrual adjustments

Interfund transfers

Unbudgeted revenues and expenditures

Interfund reimbursements


Budgetary Comparison Schedule

• If the budgetary comparison schedule is presented as part of RSI, budget-related notes should accompany RSI, not remain in notes

• Budgetary schedules should be confined to those that are for the legally adopted budgets of the general fund and major special revenue funds


Combining Individual Fund Statements & Schedules

• Provide detail listing of nonmajor governmental funds– Individual fund balance sheets– Individual fund statements of revenues, expenditures,

and changes in fund balances• Provide detail listing of nonmajor enterprise funds

and internal service funds– Statements of net assets– Statements of revenues, expenses, & chgs in net assets– Statements of cash flows


Combining Stmts and Individual Fund Stmts

• Include individual fund financial statements for fiduciary funds

• Present budgetary comparison schedules for nonmajor governmental funds of the primary government (including nonmajor special revenue funds, debt service and capital projects funds, and funds of blended component units) for which there are legally adopted budgets


Statistical Section

• Purpose: provide the reader with supplementary data and trends over an extended period, usually 10 years or more; however, some data relates only to a single year

• Also presents nonfinancial information, such as social, economic, and demographic data

• Auditor responsibility: review and cross-reference to introductory and financial sections of CAFR


Statistical Section – Required Categories

1. Financial Trends– Info about net assets, changes in net assets,

governmental fund balances, and changes in governmental fund balances

2. Revenue Capacity– Identify most significant revenue source (likely property

tax revenues)– Include revenue base, revenue rates, principal revenue

payers


Statistical Section – Required Categories, cont.

3. Debt Capacity– Ratio of outstanding debt, direct and overlapping debt,

debt limitations, pledged-revenue coverage

4. Demographic and Economic Information– Information about principal employers– Information about demographic and economic indicators

(e.g. population, total personal income, per capita personal income, and unemployment rate)

5. Operating Information– Include info about government employees, operating

indicators, and capital assets


Other Reports

• Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards

• Independent Auditor’s Report on Compliance with Requirements Applicable to Each Major Federal Program and State Project and on Internal Control over Compliance in Accordance with OMB Circular A-133 and Chapter 10.550, Rules of the Auditor General


Other Reports, continued

• Schedule of Federal Awards and State Financial Assistance

• Notes to Schedule of Federal Awards and State Financial Assistance

• Schedule of Findings and Questioned Costs• Management Letter


Questions??

Andrew LaflinCliftonLarsonAllen LLP(813) [email protected]

basic overview of the cafr

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