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What users want in government financial reports.

Annual reports prepared according to the standards of the Governmental Accounting Standards Board often contain more than 30 pages of notes--one recent report contains 70 pages. (See exhibits 1 and 2 on pages 93 and 94.) Although due process procedures are intended to ensure that each required disclosure specified in GASB standards is needed, the cumulative volume of information raises these questions:

* Do current GASB standards require note disclosures that no longer serve a useful purpose?

* Are there disclosure needs that current GASB standards don't meet?


To answer these questions, the GASB sponsored a research study on note disclosures in 1987-88. A series of interviews was held with representatives of important user groups: debt rating agencies, debt insurers, underwriters, investment bankers, bond attorneys, legislative and oversight officials, public finance researchers and citizen advocate and information groups. A sample set of notes to financial statements was sent to each interviewee before the interview. A total of 55 individuals representing 28 organizations were interviewed.

In every interview, the main interest of serious readers--persons whose occupations require regular use of government financial reports--was on major individual operating funds and enterprise funds with material amounts of outstanding debt. However, data presented in the general purpose financial statements are aggregated by fund type. This finding should be of special interest to auditors and their clients because only the general financial statement and its notes usually are covered by the independent auditor's report.


Although the objectives of users in each category differed, there was general agreement that notes to financial statements should be concise presentations of essential information. Interviewees had very little interest in

* General policy statements.

* Recitations of financial reporting standards.

* Lengthy explanations of unessential details.

If a reporting entity followed accounting policies not in conformity with generally accepted accounting principles--particularly policies relating to revenue recognition and expense or expenditure recognition--interviewees said notes should disclose this. Also, the entity should disclose situations in which its accounting policies differed from those used during the previous year. To the extent policy statements are needed, respondents indicated they should be presented with the appropriate note or notes explaining the items appearing in the financial statements.

Also considered useful were disclosures regarding

* Events of noncompliance with laws, regulations and agreements.

* Material contingent liabilities.

* Significant effects of subsequent events.

Although these disclosures are useful as they are now presented, respondents suggested they would be even more useful if they were expanded.


Rather than present a financial picture at one given point in time, respondents wanted to know whether balance sheets are representative of an entity's financial position during the fiscal year. Also, they wanted to know whether the revenues and expenditures reported for the year fit the trend of revenues and expenditures over time and whether events have occurred, or are expected to occur, that may affect revenue streams or expenditures materially.

Interviewees didn't expect annual forecasts but they wanted reports to contain information that would help them develop their own evaluations of financial position and results of operations of individual funds--not fund types.


Specifically, serious readers wanted disclosures of events or actions that may materially affect financial data after the balance sheet date. These include

Events of noncompliance. Although Statement on Auditing Standards no. 63, Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance, now provides guidance to independent auditors on this subject, it hadn't been promulgated at the time of the study. Nevertheless, interviewees asked for note disclosure of violations of laws, regulations, contracts, debt covenants or other agreements that could materially affect the financial statements. Examples are failure to comply with restrictions on the use of revenue and other financing sources, expenditures in excess of appropriations, expenditures for unauthorized purposes and failure to meet the reporting requirements of higher jurisdictions. Interviewees added disclosures should include a brief statement of actions taken, or to be taken, to prevent recurrence of the violations. If no action has been taken and none is planned, the note should say as much.

Contingencies, including litigation. Interviewees want to be informed of potential material liabilities.

Events presaging financial stress. Readers wanted to know about events occurring, or expected to occur, that would be likely to cause the government to incur large capital outlays or increased operating expenditures in advance of future revenues. Examples include the development of a major resort, theme park or factory.


What GASB requires as the basic notes

to financial statements

* Summary of significant accounting policies (section 2200, paragraph .107), including

1. Criteria used to determine the scope of the reporting entity (section 2100, paragraphs 121 and .122) and component units combined to fom the reporting entity, including key criteria considered (section 2600, paragraphs .115 and .116).

2. Revenue recognition policies (section 1600, paragraph .130).

3. Method of encumbrance accounting and reporting (section 1700, paragraph .130).

4. Policy with regard to reporting infrastructure assets (section 1400, paragraph .109).

5. Policy with regard to capitalization of interest costs on fixed assets (section 1400, paragraph .111).

* Cash deposits with financial institutions (section C20).

* Investments (section 150).

* Significant contingent liabilities (section 1500, paragraph .110).

* Encumbrances outstanding (lapsed) (section 1700, paragraph .129(d)).

* Significant effects of subsequent events.

* Pension plan obligations (section P20).

* Material violations of finance-related legal and contractual provisions (section 1200, paragraph .112).

* Debt service requirements to maturity (section 1500, paragraph .108).

* Commitments under noncapitalized (operating) leases (section 1400, paragraph .108, and section L20, paragraphs .123 and .124).

* Construction and other significant commitments.

* Changes in general fixed assets (section 2200, paragraph .106).

* Changes in general long-term debt (section 2200, paragraph .106).

* Any excess of expenditures over appropriations in individual funds.

* Deficit fund balance or retained earnings of individual funds.

* Interfund receivables and payables.

Source: Codification of Governmental Accounting and Financial Reporting Standards, 2d ed., section 2300.104, GASB, 1987.


The laws of a number of jurisdictions mandate that revenues and expenditures be budgeted on a basis other than GAAP. GASB standards require these differences be reconciled on the face of the financial statements or in accompanying notes. Interviewees said their information needs would be better served if GASB required several additional disclosures.

Material differences between original budget and final amended budget. Respondents wanted disclosure of material differences between revenues (by source) and appropriations (by function) in the budget approved at the beginning of the year and they wanted the revenues (by source) and appropriations (by function) in the final amended budget for the year. They also asked for explanations of any material differences.

Budget/GAAP reporting differences. If the budget and GAAP reporting differences aren't reconciled on the face of the financial statements, readers indicated the notes should set forth only material differences.



GASB standards currently require an entity to present a combined statement of revenues, expenditures and changes in fund balances for all government fund types and a combined statement of revenues, expenses and changes in retained earnings for proprietary fund types. The standards require note disclosure of policies for accounting recognition of revenues, expenditures and expenses but interviewees didn't consider these useful. Instead of the current general policy statements, the interviewees requested additional information.

Revenues. Respondents recommended disclosure for each major fund, for the current and four preceding years, about actual property tax rates compared with maximum statutory property tax rates; amounts of levies, collections and delinquencies as a percentage of leviews; sales tax rates and collections; income tax rates and collections; and similar data for each major revenue source. Notes, they said, also should describe threats of material interruption of revenue streams.

Expenditures/expenses. Respondents wanted five years of data for each significant function, program or other category for each major fund.


Additional GASB note disclosures required,

when applicable

* Claims and judgments (section C50, paragraphs .112-114).

* Property taxes (section P70, paragraphs .103-.105 and .109).

* Segment information for enterprise funds (section 2500).

* Budget basis of accounting and budget/GAAP reporting differences not otherwise reconciled in the financial statements (section 1700 and section 2400, paragraphs .104 and .113-.123).

* Short-term debt instruments and liquidity.

* Related party transactions.

* Capital leases (section L20, paragraphs .123 and .124).

* Contingencies (section 1500, paragraph .110).

* Joint ventures (section J50, paragraph .103).

* Special termination benefits (section T25, paragraph .103).

* Extinguishment of debt (section D20, paragraphs .111-.114).

* Grants, entitlements and shared revenues (section G60, paragraphs .107 and .112).

* Nature of total column use in combined financial statements (section 2200, paragraph .113).

* Methods of estimation of fixed asset costs (section 1400, paragraph .112).

* Fund balance designations (section 1800, paragraph .124).

* Interfund eliminations in combined financial statements not apparent from heading (section 2200, paragraphs .108-.112).

* Pension plans--in both separately issued plan financial statements and employer statements (section P20 and section Pe6).

* Bond, tax or revenue anticipation notes excluded from fund or current liabilities (proprietary funds) (section B50, fn 2).

* Nature and amount of inconsistencies in financial statements caused by transactions between component units having different fiscal yearends (section 2600, paragraph .114).

* Separate summary of significant accounting policies for discrete presentations (section 2600, paragraph .119).

* Relationship of component unit of oversight unit in separately issued component unit financial statements (section 2600, paragraph .119).

* Deferred compensation plans (section D25, paragraph .113).

* Reverse repurchase and dollar reverse repurchase agreements (section R10).

* Special assessment debt and related activities (section S40, paragraphs .120 and .121).

* Demand bonds (section D30, paragraphs .109 and .110). [National Council on Government Auditing interpretation 6, paragraph 5, as amended.]

Source: Codification of Governmental Accounting and Financial Reporting Standards, 2d ed., section 2300.105, GASB, 1987.



Current GASB standards specify the notes to the financial statements disclose details about each major category of assets, liabilities and fund equity. Interviewees offered several additional disclosures for the GASB's consideration.


Cash. Notes should include a cash flow statement discussing short-term borrowing and repayment during the year.

Investments. Disclosures should contain a brief statement of investment restrictions set by state law and local laws, a brief statement of the entity's investment policies and a summary of activity during the year--not just yearend balances.

Receivables (all categories including interfund receivables). Users again wanted to know about activity during the year--not just yearend balances. They also asked for the ages of receivables and any other useful information for evaluating the adequacy of allowances for uncollectibles.

Capital assets. Interviewees as a group said they had little interest in disclosures about capital assets at yearend or changes in such assets during the year, unless the relationship of the changes to the entity's capital improvement program was made clear. This suggestion has been instrumental to GASB's ongoing capital assets reporting project.


Short-term debt. Short-term debt incurred and repaid during the year should be disclosed, respondents said. Also, the notes should disclose anything unusual or significant about the debt.

Long-term debt. Readers said notes should disclose the amounts of required interest payments and principal payments for tax-supported debt; special assessment debt; and revenue debt, by enterprise, for the year following the balance sheet date. Interviewees said they would be satisfied if the note summarized total interest and principal payments required for subsequent years until maturity and if it specified the amount and year of maximum annual debt service. Any other unusual or significant facts relating to long-term debt also should be disclosed.

Pension plan obligations and other employee benefits. Interviewees requested disclosure of the portion of the government's resources used, and to be used, for benefits. Moreover, actions to be taken in order to cover any unfunded liability also should be disclosed.

Construction and other commitments. Readers asked for a description of the entity's ultimate commitments for construction and other projects and the time span before the commitments are extinguished. The relation of current construction to the government's capital improvement program, if one exists, also should be disclosed.


Assuming reservations are disclosed on the face of the statements, respondents said the notes need disclose only material equity transfers and other major changes.


Although the GASB technical project agenda for the remainder of 1990 is already set, a separate project on note disclosure will be started as soon as time permits. Such a project is expected to reexamine disclosures in their entirety and delete those that duplicate one another or are marginally useful. Those notes that are useful will be reorganized or expanded.

The research report already has had a beneficial effect by raising the sensitivity of the GASB to the practical limits of voluminous note disclosures. Thus, in ongoing GASB projects, each potential disclosure is being examined in the light of this study. Copies of the report, A Study of the Usefulness of Disclosures Required by GASB Standards, are available for $10 from the GASB Order Department, P.O. Box 30784, Hartford, Connecticut 06150.
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Author:Antonio, James F.
Publication:Journal of Accountancy
Date:Aug 1, 1990
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