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Using charts and graphs to improve management's discussion and analysis.

State and local governments are currently implementing the most significant financial reporting changes in the history of government financial reporting. Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, requires governments to produce new government-wide information using essentially the same measurement focus and basis of accounting as business organizations. GASB 34 also requires governments to present a Management's Discussion and Analysis, or MD&A, with their basic financial statements. MD&A is an important new reporting requirement for governments.

The purpose of the MD&A is to provide an objective and easily readable analysis of a government's financial activities based on currently known facts, decisions, or conditions. In requiring the MD&A, the GASB acknowledges the value to stakeholders of management's knowledge about transactions, events, and conditions reflected in government financial reports, as well as the value of management's knowledge of the fiscal policies governing government operations. The MD&A allows a government's financial management the opportunity to present both a short-term and long-term analysis of those activities. The GASB considers the MD&A a significant step in broadening the communication base of GAAP reports.

GASB 34 also encourages the use of charts, graphs, and tables in the MD&A to enhance the understandability of the information. GASB's first implementation guide on GASB 34 illustrated the use of simple charts to communicate key information. The illustrative MD&A in the implementation guide uses pie charts to reflect the relative importance of the various revenues and expenses. GFOA also uses charts in the example MD&A included in the GASB 34 edition of Governmental Accounting, Auditing, and Financial Reporting, or GAAFR. In addition to pie charts, the GAAFR MD&A illustration includes bar charts to reflect the relationship between program revenues and expenses.

Given the expectations that the MD&A will (1) enhance the usefulness of the basic financial statements for many users by providing management's analysis and (2) expand the use of the basic financial statements (or that the MD&A will be more widely read than the statements), it is important that the MD&A is an effective, understandable communication. The graphs and charts in the GASB implementation guide and in the GAAFR demonstrate some ways that charts and graphs can be used to improve the MD&A. The importance of effective communication in a document expected to have broad use (and, in many cases, use by less sophisticated users) warrants evaluating whether other charts and graphs can be used to more effectively communicate the information and analysis that management believes will benefit users. After a brief summary of the information required in MD&A, this article explores the types of charts that a government should consider using in its MD&A.


GASB 34 specifies the items that must be in the MD&A, and governments are required to limit their discussion to these items only (GASB 38 clarified this point). However, the MD&A requirements are somewhat general. Governments should effectively address the most significant items affecting financial operations and avoid "boilerplate discussion."

The MD&A should precede the basic financial statements and provide an objective and easily readable analysis of the government's financial activities based on currently known facts, decisions, and conditions. Governments should ask: What are the most significant financial changes to the government this year and the major financial issues facing the government? The MD&A should describe and explain the reasons for the changes and conditions.

The MD&A should focus on the primary government and discuss current-year results in comparison with the prior year. The emphasis should be on the current year. The discussion should provide a fact-based analysis that discusses both positive and negative aspects of the comparison.

Certain condensed comparative financial information must be presented from the government-wide statements. This comparative information should reveal significant financial changes and support management's analysis of the government's financial position, results of operations, and cost of services. Two schedules are commonly used to present this information. The analysis should assist users in assessing whether financial position has improved or deteriorated during the year.

Significant changes in several other areas should also be discussed in the MD&A. An analysis should be provided for any significant changes in fund balances or net assets. Also, significant variances between original and final budgets, as well as significant variances between final budgets and actual amounts, should be discussed.

Additionally, the MD&A must provide a description of significant capital assets and long-term debt activity during the year, including significant commitments, changes in credit ratings, and other debt limitations that may impact future financing plans. Discussions regarding infrastructure are required if a government uses the modified approach.

Finally, the MD&A must describe currently known facts, decisions, or conditions that are expected to have a material effect on the financial position or results of operations.


Schedules like those typically used to present comparative condensed financial information assist users in assessing a government's financial position and whether the financial position improved or deteriorated during the year. Can charts and graphs further improve the communication of such information? If so, what types of charts would be the most useful? Would pie, bar, or line charts be the most useful?

Charts and graphs can help management focus readers' attention on key aspects of the condensed financial statement data or other data that management wishes to emphasize. They call be very effective communication tools to help ensure both that readers clearly understand the point that management desires to make and that readers note particular aspects of the information that are interesting to management. Pie charts, bar graphs, and line charts are useful for achieving somewhat different purposes. As such, the most useful chart depends on what management desires to communicate.


Pie charts are useful for conveying the current composition of selected financial statement elements consisting of several subclassifications. They can be particularly effective in reflecting percentage relationships or other proportional relationships. Several potential uses of pie charts in a government's MD&A come to mind:

* The portion of total expenses associated with each function

* The portion of program revenues comprised of each of the broad classifications of program revenues

* The portion of total revenues represented by each revenue source

* The portion of total general revenues from each source of general revenues

* The portion of total net assets associated with each category of net assets

Charts or graphs that indicate the relative importance of a revenue or expense item may be very useful in many situations, such as when policy decisions or existing conditions are expected to have a significant impact on certain revenue or expense items in the coming year. The significance (or insignificance) of these changes may be better understood by using a pie chart to indicate the relative significance of the item or items in question. Such charts can help users assess the importance of changes to these revenue or expense items on the government's overall activities.

The best examples of using pie charts to indicate the relative significance of items are for revenues and expenses. For example, Exhibit 1 is a pie chart of governmental activities revenue sources. A similar chart can be used to show the uses of those revenues by functional expense categories (e.g., public safety, public works, culture and recreation, health and sanitation, debt service, etc.). These charts are similar to the ones used in the implementation guide and in the GAAFR. A pie chart can also be used to indicate the relative significance of the components of net assets (Exhibit 2).


Bar charts (or column charts) are sometimes preferable to pie charts for presenting the components of financial statement elements when dollar amount data are being presented instead of percentage data. Bar charts have added power in that they also may be used to make direct comparisons between two or more items. These charts may be used to compare (1) financial statement elements within a particular year or (2) information for two or three years. A chart comparing program revenues and program expenses by function is an example of the former. Charts comparing selected financial statement elements over two or three years are examples of the latter.

Charts that highlight differences between two years can help users identify and understand significant changes during the year. For example, a bar chart like the one in Exhibit 3, which compares spending for governmental activities by expense category over two fiscal years, is helpful in identifying significant changes in expenses between the two years. Exhibit 4 presents information comparing the components of primary government net assets for the two years.


Bar charts can also be used to compare different levels of activity for certain items. It is important to remember that information should held users identify the most significant changes for the year. Some charts are most effective if they reflect actual dollar amounts, while others are more useful if they report percentages. Simply showing that a revenue source (e.g., property taxes) totaled $3 million for the year is only somewhat helpful. Showing that property taxes represent 45 percent of total revenues is often more helpful. Showing that property taxes accounted for 42 percent of total revenues last year and 45 percent this year is even more helpful.

Caution should be used to ensure that the measurement unit used communicates management's point clearly and effectively. A relatively small dollar change to a small revenue or expense item may result in a large percentage change. Likewise, a relatively large dollar change to a revenue or expense item may represent only a small percent change for that item.

To illustrate the need for caution in choosing the measurement unit to be used, consider Exhibit 5. Exhibit 5 is a bar chart reflecting the percentage change in expenses between 2001 and 2002. It is obvious in looking at the chart that the largest percentage change in expenses occurred in the cemetery category. However, this is a small dollar increase ($200,000). Such a chart might be useful if the purpose is to communicate that the cost of providing certain significant services are increasing at a disproportionately high rate. In other circumstances, like the one shown here, the chart might mislead users with respect to which functional areas to be most concerned about. Sometimes combining smaller items can help alleviate this problem and allow users to focus on the changes in major items.

Exhibit 6 is a bar chart reflecting the dollar change in expenses between 2001 and 2002. Again, the effectiveness of the chart depends on what point management is attempting to make. Here, the largest increase is related to public safety. However, the increase represents only a 3 percent increase for this line item, which might be low relative to the overall cost increases the government experienced during the year.


Line charts (and similar scatter plots) are most useful to present a trend over a period of time. If a key point in understanding a government's financial position and changes therein is the recognition that health care costs have been accelerating rapidly over recent years or that a key revenue source has been declining, a line chart can effectively communicate such information. Likewise, if it is useful for readers to understand that revenue increases over several years have not kept pace with increasing costs or that the government's ability to provide the current level of services is becoming more dependent or less dependent on a certain revenue source, a line chart may be a particularly effective tool for communicating this information.

Exhibit 7, for example, graphs property tax revenues, total revenues, and total expenses for governmental activities between 1998 and 2002. The chart indicates that this government is increasing its reliance on non-property-tax revenues to support its operations. If current conditions indicate that these non-property-tax revenues will be less in the coming year, this chart could vividly communicate the significance of that condition.



Charts also can be used to display other types of financial information. For example, pie and bar charts can be used to display information related to capital assets and long-tern1 debt. Pie charts would be helpful to display the composition of these items, while bar charts may be useful to highlight changes by reporting comparative data. Charts call also be useful to display budget and fund information, as well as nonfinancial performance measurements that cast light on financial performance.

How many charts should a government use? Like most things, too much of a good thing may not be good. Charts are a good way to highlight significant changes for the year. If there are too many charts, however, they may lose their effectiveness. The reader may become prone to ignore the charts and find them a nuisance if too many are presented. On the other hand, if charts are used primarily to improve communication regarding the most significant points in the MD&A, readers are more apt to pay close attention to the charts and thereby maximize their benefit. The optimum balance will be a function of the importance of the points that need to be communicated and how dramatically a chart improves the effectiveness of communication.

The tendency in practice has been to underutilize charts and graphs in the MD&A. A review of the MD&A from more than 50 governments of varying sizes found that a majority did not use any charts and graphs. Almost all that did include charts and graphs presented only those that had been illustrated in the implementation guide or in the GAAFR. Much can be gained by thoughtful consideration of how to use charts to communicate key points that management wishes to emphasize in its analysis.


The MD&A should assist users in assessing whether the financial position of a government improved or deteriorated by providing an analysis of significant changes during the year. Charts can be an effective way to highlight important information, and governments should consider using these in their MD&A.

Pie charts are an effective way to display the proportional size of various components of an item such as sources of revenues, expenses of various functions, or classifications of net assets. Bar charts that reflect comparative data can be used to highlight significant changes during the year or to compare financial statement elements within a year. Line charts are preferred to reflect longer-term trends in revenues, expenses, or other items. In selecting what type of chart to use, management needs to determine which aspect(s) of the information they wish to convey to the reader.

Note: The data for the charts and graphs in this article are from the first implementation guide to GASB 34.
Exhibit 1: Governmental Activities Revenue
Sources for Fiscal Year 2002

Charges for service 15%
Federal grants 3%
State grants and entitlements 8%
Property taxes 56%
Other taxes 13%
Federal entitlements 2%
Other 3%

Note: Table made from pie chart.

Exhibit 2: Primary Government Net Assets at 2002

Invested in capital assets, 84%
net of related debt

Restricted 13%

Unrestricted 3%

Note: Table made from pie chart.

Exhibit 5: Percent Change in Governmental Activities Functional
Expenses between Fiscal Years 2001 and 2002

General government 4.3%
Public safety 3.0%
Public works -3.8%
Engineering services -7.1%
Health and sanitation 3.1%
Cemetery 40.0%
Culture and recreation -3.4%
Community development -9.1%
Education 2.8%
Interest on long-term debt -1.6%

Note: Table made from bar graph.

Exhibit 6: Dollar Change in Governmental Activities Functional
Expenses between Fiscal Years 2001 and 2002

 in millions
 of dollars

General government 0.4
Public safety 1.0
Public works -0.4
Engineering services -0.1
Health and sanitation 0.2
Cemetery 0.2
Culture and recreation -0.4
Community development -0.3
Education 0.6
Interest on long-term debt -0.1

Note: Table made from bar graph.

BRUCE W. CHASE, Ph.D., CPA, is professor of accounting at Radford University, where he directs the university's Governmental and Nonprofit Assistance Center. He is the recipient of the 2002 Education and Training Award from the Association of Government Accountants, and he has been recognized for outstanding service by the Virginia Government Finance Officers Association. Dr. Chase holds a Ph.D., MBA, and bachelor's degree from Virginia Commonwealth University,

CRAIG D. SHOULDERS, Ph.D., CPA, is associate professor of accounting at Virginia Polytechnic Institute and State University. He has coauthored two Prentice Hall accounting textbooks, including one on state and local government accounting, as well as several continuing education courses on governmental accounting and financial reporting. Dr Shoulders holds a Ph.D. from Texas Tech University, a master's degree from the University of Missouri-Columbia, and a bachelor's degree from Campbellsville University.
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Author:Chase, Bruce W.; Shoulders, Craig D.
Publication:Government Finance Review
Geographic Code:1USA
Date:Oct 1, 2003
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