NEW GFOA PROGRAM BASIS REPORTS FOR MODIFIED CASH. NEW ENGLAND STATES GOVERNMENT FINANCE OFFICERS ASSOCIATION Manchester, Vermont September 23, 2013

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1 1 NEW GFOA PROGRAM FOR MODIFIED CASH BASIS REPORTS NEW ENGLAND STATES GOVERNMENT FINANCE OFFICERS ASSOCIATION Manchester, Vermont September 23, 2013 Krisztina Dommer Senior Manager Technical Services Center National GFOA

2 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 2

3 BACKGROUND AND ENVIRONMENT 3 Part 1

4 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 4

5 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 5

6 GAAP ALTERNATIVES Cash basis Modified cash basis Regulatory basis Some states have legal financial report filing requirements 6

7 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 More prone to manipulation May be unsatisfactory for certain users Rating agencies, creditors, investors, taxpayers, and officials 7

8 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. 8

9 CURRENT GUIDANCE 9 Part 2

10 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 ( product code APAOCBO12P). 10

11 AUTHORITATIVE AICPA GUIDANCE GAAP alternatives = Special purpose frameworks Financial reporting frameworks other than GAAP are identified in AICPA AU-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) 11

12 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. 12

13 NEW GFOA RECOGNITION PROGRAM 13 Part 3

14 CERTIFICATE OF CONFORMANCE PROGRAM Established by the GFOA Executive Board in 2012 To establish uniformity in financial reporting on a basis of accounting other than GAAP. To help give smaller governments a stepping stone toward GAAP. 14

15 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. 15

16 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. 16

17 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. 17

18 CERTIFICATE OF CONFORMANCE V. CERTIFICATE OF ACHIEVEMENT The Certificate of Conformance Program 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 Certificate of Conformance Program may be a first step toward GAAP financial reporting and participation in the Certificate of Achievement Program. 18

19 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 19

20 OVERALL REPORT: SGAFR (V. CAFR) Comparison Certificate of Achievement Program Comprehensive annual financial report (CAFR) Certificate of Conformance Program Small government annual financial report (SGAFR) Similarities Both contain introductory section Both contain financial section Difference CAFR contains statistical section SGAFR requires only selected 5-year trend tables 20

21 SUBMISSIONS AND JUDGING Reports reviewed by a combination of Volunteer reviewers GFOA professional staff 6-month submission deadline Special exceptions for first year 21

22 CHECKLISTS AND SAMPLE SGAFR Available on GFOA website () Checklists General purpose local governments School districts Stand-alone business-type activities Sample SGAFR 22

23 PROGRAM FEES Based on total revenues Total Revenues GFOA Member Fee Nonmember Fee Under $1 million $290 $580 $1-10 million $370 $740 Over $10 million $435 $870 Nonmembers that submit for the first time receive a GFOA membership that allows submission at member rate. 23

24 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. 24

25 25 APPLICATION OF THE MODIFIED CASH BASIS Part 4

26 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) 26

27 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 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 27

28 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) 28

29 29 FORMAT AND CONTENT Part 5

30 PRELIMINARY NOTE Required supplementary information (RSI) 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 30

31 INTRODUCTORY SECTION Letter of transmittal Organization chart List of principal officials 31

32 LETTER OF TRANSMITTAL Start with MD&A Rename: Letter of Transmittal Add transmittal letter discussion topics Keep most MD&A topics as they are. A New England Town s MD&A page 32

33 ORGANIZATIONAL CHART Formatting left to management s discretion 33

34 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. 34

35 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 for enterprise funds. Unlike GAAP use of the same basis of accounting in both 35

36 BASIC FINANCIAL STATEMENTS (CONT.) Present budgetary comparisons as basic financial statements (RSI not an option) General fund Major special revenue funds with annual (or biennial) appropriated budgets 36

37 ILLUSTRATIVE BUDGETARY COMPARISONS 37

38 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. 38

39 NOTE DISCLOSURE SPECIFICS Explanation of modified cash basis No requirement to disclose capital assets Program policy requires the disclosure of longterm liabilities Debt, compensated absences, claims and judgments, and pension-related liabilities. 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 fiveyear increments thereafter. Otherwise, GAAP disclosures, as applicable to the modified cash basis 39

40 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. 40

41 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 41

42 TREND INFORMATION EXAMPLE 42