Spring 2006 issue of Horizons

Jeff Winter, CPA

Rodney Rice, CPA

haustible; and (2) depreciable capital assets, net of accumu- lated depreciation. Often, both types of capital assets are reported together in the statement of net assets. • The unreserved fund balance reported in the individual governmental fund often is not reported as restricted net assets for purposes of government-wide reporting in the statement of net assets. The government-wide statement of net assets typically will include restricted components such as “invested in capital assets, net of related debt” and “restricted for debt or capital.” Everything else is considered unrestricted. It should be noted that the term “restricted” as used in the government-wide financial statements is not the same as “reserved,” which is the terminology used in the gov- ernmental fund financial statements. Fund balances not con- sidered reserved from the narrow perspective of the individ- ual fund may be restricted from the broader government-wide perspective. • Certain revenues are not properly reported as program revenues in the government-wide statement of activities. The government-wide statement of activities has a “program” focus, and governments are encouraged to report activities at the program level, whenever practical. Items such as capital contributions, rents, fees, permits, fines and forfeitures should be program revenues. • Net pension obligations should be reported in the govern- ment-wide financial statements. Both net pension assets and obligations under full accrual accounting should be reported. Fund Financial Statements • The liability for compensated absences reported in the governmental fund's balance sheet should be limited to the amount due resulting from employees separated as of the end of the fiscal period. Inconsistent treatment of compensat- ed absences still exists even after the issuance of GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements. In most circumstances, there should be virtually no accrual recognized in the governmental funds for compensated absences because, as the new interpreta- tion states, “compensated absences liabilities are normally liquidated with expendable available financial resources, and a governmental fund liability and expenditure should be rec- ognized as payments come due each period upon the occur- rence of relevant events such as employee resignations and retirements.”

• Significant changes in major funds other than the general fund are often missed. The MD&A should include an analysis of balances and transactions of individual funds. In addition to the general fund, this analysis also should include any other major funds with significant changes or transactions. Also addressed should be the reasons for significant changes in fund balances or net assets and whether restrictions, com- mitments or other limitations significantly affect the availabili- ty of fund resources for future use. • Failure to limit the discussion to currently known facts, decisions, or conditions. A common reporting deficiency is the discussion within the MD&A of the speculative effect on the future financial position or the results of operations from cur- rent events, decisions or conditions. GASB Statement No. 34 Basic Financial Statements – and Management’s Discussion and Analysis – for State & Local Governments (GASB34) states that the MD&A should provide an objective and easily readable analysis of the government's financial activities based on "currently known facts, decisions or conditions." In addition, the MD&A should include a description of currently known facts, decisions or conditions that are expected to have a significant effect on the financial position (net assets) or the results of operations (revenues, expenses and other changes in net assets). • Significant differences between the original budget and the final amended budget are not discussed. Another common requirement omitted from the MD&A is the analysis of any significant variations between the original and final budget amounts for the general fund (or its equivalent). Although most MD&As include an analysis between the final budget amounts and the actual budget results, an often overlooked communication is the analysis of any significant variations between the original adopted budget and the final amended budget. Not only should the analysis include reasons for vari- ations within the current year, but also any currently known reasons for those variations that are expected to have a sig- nificant effect on future services or liquidity. Government-Wide Statements • Depreciable capital assets should be shown separately from those that are not being depreciated in the government- wide statement of net assets. The government-wide state- ment of net assets should report two classifications of capital assets: (1) capital assets not being depreciated, such as land, construction in progress, certain treasures held by a museum, and other assets that are considered to be inex-

Continued on page 42

40 • spring 2006 issue