• Financial Statement Elements
• Liabilities
• Fund Balance/Net Assets
• Revenues
• Fund Financial Statements-Reporting of Expenditures/Expenses
• Governmentwide Statements-Reporting of Expenses
• Financial Statements
• Conclusion

GASB Statement 34 does not mandate that governments prepare and publish an annual financial report. However, the Statement establishes new financial reporting requirements for governmental entities by restructuring much of the information that entities have presented in the past. The impact of this Statement on the presentation of the annual financial statements is depicted in table 5. The table identifies the differences between the Statement 34 presentation and that of the previous governmental reporting model used to prepare a Comprehensive Annual Financial Report (CAFR). Many of the CAFR schedules and presentations provide information beyond that required by Statement 34.

Table 5 (GASB Statement 34) compares the contents of the CAFR under the new reporting model per GASB Statement 34 with the contents of the CAFR under the previous model. Comparisons identify key components of each chapter for an overall comparison of the chapter between models. The table is not intended to be an item-by-item comparison of the models.

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As table 5 shows, the new reporting model involves significant changes to the financial statements prepared and presented by governmental entities. The next sub-section outlines the major elements of the financial statements and related disclosures as required by Statement 34:

• Basic Financial Statements
• Management's Discussion and Analyses (MD&A) and Other RSI
• Component Units

• governmentwide financial statements,
• fund financial statements, and
• note disclosures.

Governmentwide Financial Statements

The purpose of governmentwide financial statements is to present the financial position and the operating results of the governmental entity as a whole. The statements are expected to provide users with operational accountability information and to enable them to do the following:

• Understand the true financial position of the governmental entity, including capital and financial assets and long-term as well as short-term liabilities.
• Determine whether the entity is able to continue to provide current service levels and meet its obligations as they become due.
• Determine the operating results of the entity, including the economic cost and the net cost of services, and assess the economy, efficiency, and effectiveness of operations.

The governmentwide financial statements are

• Statement of Net Assets and
• Statement of Activities.

The Statement of Net Assets presents a columnar presentation of the assets, liabilities, and net assets of the reporting entity in two categories: governmental activities and business-type activities. Discretely presented component units are reflected in a separate column or columns on the face of the statement. Statement 34 does not alter the requirements for presenting component units as established by Statement 14, The Financial Reporting Entity (issued in June 1991). Table 6 highlights the major differences between the Statement 34 presentation for the statement of net assets and the balance sheet presentation under the previous reporting model.

As mentioned above, Statement 34 requires separate columns for governmental activities and business-type activities of the reporting entity in the statement of net assets. Table 7 outlines definitions within the Statement for these types of activities.

Statement 34 states that although internal service funds are reported as proprietary funds of the reporting entity, the activities accounted for in internal service funds are usually more governmental than business-type in nature. If enterprise funds are the predominant or only participants in an internal service fund, however, the entity should report the internal service fund's residual assets and liabilities within the business-type activities column in the Statement of Net Assets.

Other presentation requirements relative to the Statement of Net Assets follow:

• A total column is required for the primary government. A total column for the entity as a whole, including the discretely presented component units, may be presented but is not required.
• Comparative financial statements are not required but may be presented at the option of the governmental entity. If comparative financial statements are presented, all columns must be included for both years.
• Fiduciary funds and fiduciary component units are specifically excluded from the governmentwide statements because fiduciary resources cannot be used to support the entity's programs or other services.
• Statement 34 encourages the presentation of assets and liabilities that is based on their relative liquidity. A classified presentation, which distinguishes between current and long-term assets and liabilities, is also acceptable. Table 8 outlines the definitions of liquidity of assets and liabilities.

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Statement of Activities. The operations of the governmental unit should be presented in a net (expense) revenues format in the Statement of Activities. General revenues, contributions to term and permanent endowments, contributions to permanent fund principal, special and extraordinary items, and transfers should be reported separately after the total net expenses of the entity's functions to arrive at the "change in net assets" for the period. The purpose of using this format is twofold:

• To report the relative financial burden of each of the government's functions or programs on its taxpayers
• To identify the extent to which each function (program) draws from the general revenues of the organization or is self-supporting through fees and intergovernmental aid

Fund Financial Statements

Fund Financial Statements are categorized into three fund types described as follows.

Governmental Fund Financial Statements. Governmental fund financial statements (including financial statements for the general, special revenue, capital projects, debt service, and permanent funds) should be prepared using the current financial resources measurement focus and the modified accrual basis of accounting. Under this measurement focus and basis of accounting, revenues should be recognized in the accounting period in which they become available and measurable and expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term debt, which should be recognized when due.

Proprietary Fund Financial Statements. Proprietary fund financial statements (including financial data for enterprise and internal service funds) should be prepared using the economic resources measurement focus and the accrual basis of accounting. Accordingly, revenues should be recognized in the accounting period in which they are earned and become measurable, and expenses should be recognized in the period incurred, if measurable.

Fiduciary Fund Financial Statements. Fiduciary fund financial statements (including financial data for fiduciary funds and similar component units) should be prepared using the economic resources measurement focus and the accrual basis of accounting. Revenues should be recognized in the accounting period in which they are earned and become measurable, and expenses should be recognized in the period incurred, if measurable.

Table 9 compares the financial statement types by focus and basis of accounting.

Note Disclosures

Section 2200 of GASB Codification, Comprehensive Annual Financial Report, requires notes to the financial statements that are essential to present fairly the financial position and results of operations (and cash flows of those types of funds and discretely presented component units that use proprietary fund accounting). The notes to the financial statements should focus on the primary government and its discretely presented component units.

GASB Statement 34 does not amend the existing general note disclosure requirements but requires additional disclosures as follows.

Summary of Significant Accounting Policies (Additional Disclosure Requirements).

• A description of the new governmentwide financial statements indicating the elements of the statement of net assets and the statement of activities, noting the exclusion of fiduciary funds and component units that are fiduciary in nature, and the measurement focus and basis of accounting used.
• The policy for eliminating internal activity in the statement of activities.
• The policy for applying FASB pronouncements issued after November 30, 1989, to proprietary funds and governmentwide financial statements.
• The policy for capitalizing assets and for estimating useful lives (for calculating depreciation expense).
• A description of the types of transactions included in program revenues and the policy for allocating indirect expenses to functions in the statement of activities.
• The policy for defining operating and nonoperating revenues of proprietary funds.
• The policy regarding whether the government first applies restricted or unrestricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available. In other words, governments are required to state whether they spend restricted funds only when unrestricted amounts are insufficient or unavailable or whether they spend restricted funds first and use unrestricted resources when the restricted funds are depleted. Disclosure of this policy is essential to help readers understand the significance of restricted and unrestricted net assets relative to total net assets.

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• Beginning- and end-of-year balances, with accumulated depreciation by asset class shown separately from the valuation basis
• Capital acquisitions
• Sales or other dispositions
• Current-period depreciation expense including the amounts charged to each function in the statement of activities

Required Disclosures for Long-Term Liabilities. The note disclosures should contain information about long-term liabilities, including long-term debt instruments such as bonds, notes, loans, and leases payable, as well as other long-term liabilities such as compensated absences, claims, and judgments, as follows:

• Beginning- and end-of-year balances
• Increases
• Decreases
• The portions of each item that are due within one year of the statement date
• Information on the governmental funds typically used to liquidate long-term liabilities in prior years. The disclosure should also indicate whether the government has decided to depart from the historical trend and use other funds to liquidate liabilities. The purpose of this disclosure is to give readers additional information about future claims against financial resources to help them assess the fund balances of specific funds

Disclosures Relating to Donor-Restricted Endowments. The following information is required relating to donor-restricted endowments in the notes:

• Amounts of net appreciation on investments available for authorization for expenditure by the governing board and a description on how amounts are reported in net assets
• State laws relating to the ability to spend net appreciation
• Policy for authorizing and spending investment income

The definition of a segment requires that a specific identifiable revenue stream be pledged in support of revenue bonds or other revenue-backed debt. It is not a requirement that the debt be backed solely by pledged revenues. The identifiable activity is typically the source of the pledged revenues. In addition, there must be an externally imposed requirement to separately account for the activity's revenues, expenses, gains and losses, assets, and liabilities. (GASB Statement 37, p. 17).

Segment disclosures are not required for an activity in which the only outstanding debt is conduit debt for which the entity has no obligation beyond the resources provided by related leases or loans. In addition, segment reporting is not required when an individual fund both is a segment and is reported as a major fund.

GASB Statement 34 requires the following segment disclosures:

• Type of goods and services provided by the segment
• Condensed statement of net assets
• Condensed statement of revenues, expenses, and changes in net assets.
• Condensed statement of cash flows
• Statement of activities (encouraged but not required for governments that want to present disaggregated information for multiple function enterprise funds in addition to the information above)
• Externally imposed requirements to track each element needed for condensed financial statements

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Management's Discussion & Analysis and Other RSI

The management's discussion and analysis (MD&A) is part of the required supplementary information (RSI); however, it precedes the financial statements. It should be based on currently known facts as of the date of the audit report and should

• provide a concise, unbiased, and easily readable description of the government's financial activities and
• help users understand the relationship of the results reported in the governmental activities in the governmentwide financial statements and the results reported in the governmental funds financial statements (usually focused on the major funds).

MD&A is restricted to the following topics, although there is no limit to the information that may be presented about these topics.

• Information and discussion on the basic financial statements presented, their relationship to one another, and the significant differences in the information they provide. The discussion should include the different methods of accounting used in the governmentwide and fund financial statements.
• Condensed financial information comparing the current year and the prior year. The analysis should include specific economic factors that contributed to the change. Charts and graphs may be used to supplement information in the condensed statements but should not be used in place of it.
• Objective analysis of the governmental entity's financial condition as a whole. Analysis of the government's overall financial position and results of operations should address both governmental and business-type activities separately.
• An analysis of balances and transactions on a fund basis, addressing the reasons for significant changes in fund balances or fund net assets. The analysis should also include information on whether restrictions, commitments, or other limitations significantly affect the availability of fund resources for future use.
• A discussion on significant variances among the entity's original budget, final budget, and actual expenditures for the General Fund or its equivalent and the impact of these variances on the entity's future liquidity.
• A description of activity relating to the government's capital assets and long-term debt activity during the year. This discussion should include commitments made for capital expenditures, changes in credit ratings, and debt limitations affecting the financing of planned facilities or services.
• A discussion of information about the modified approach used to report some or all of the infrastructure assets, if applicable.
• A description of currently known facts, decisions, or conditions expected to have an impact on financial position and results of operation. The term currently known is limited to events or decisions that have occurred, been enacted, adopted, agreed on, or contracted as of the date of the auditor's report. The discussion should address expected effects on both governmental and business-type activities.

The entity should ensure that information contained in MD&A is not duplicated in the letter of transmittal. Differences between MD&A and the letter of transmittal are outlined in table 10.

If the reporting entity provides comparative financial statements by presenting basic financial statements and RSI for two years, a separate MD&A for each year is not required, but it must address both years presented in the comparative financial statements. MD&A should include comparative condensed financial information and related analysis for both years.

Component Units

It is essential that governmental financial statements provide an overview of the reporting entity that is based on financial accountability, yet allow users to distinguish between the primary government and its component units. GASB Statement 14, The Financial Reporting Entity, issued in June 1991, established criteria for evaluating potential component units and provided guidance in the statement presentation of those entities that met the criteria. Component units are defined as legally separate organizations for which the primary government is financially accountable or for which the nature and significance of the relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. (Statement 14, paragraph 20)

Financial accountability for a potential component unit is determined by either of the following:

• Appointment of the voting majority of the potential component unit governing board by the primary government and either
  • the ability to impose its will on the potential component unit or
  • a relationship of financial benefit or burden with the potential component unit.
• The potential component unit is fiscally dependent upon the primary government.

In May 2002, GASB issued Statement 39, Determining Whether Certain Organizations Are Component Units, which amended Statement 14 to establish the criteria for the inclusion of organizations on this basis. A legally separate, tax-exempt organization should be reported as a component unit if all of the following criteria are met:

• The economic resources of the separate organization are received or held for the benefit of the primary government, its component units, or its constituents.
• The primary government, or its component units, may access or is entitled to a majority of the economic resources of the separate organization.
• The economic resources of an individual organization that the primary government, or its component units, is entitled to or may access are significant to the primary government. (Statement 39, paragraph 5)

Component units may be

• blended, as though they are part of the primary government, or
• discretely presented.

Blended Component Units

Even though it is preferable to distinguish between the primary government and its component units, certain component units, despite being legally separate from the reporting entity, are so intertwined with the entity that they are, in effect, the same as the primary government. Accordingly, GASB has stated that these component units should be reported as part of the primary government. Thus, the component unit's balances and transactions should be reported in a manner similar to the way balances and transactions of the reporting government itself are reported. This method of inclusion is known as blending.

A component unit should be blended in either of these circumstances:

• The component unit's governing body is substantively the same as the governing body of the primary government.
• The component unit provides services entirely, or almost entirely, to the reporting entity or otherwise exclusively, or almost exclusively, benefits the entity even though it does not provide services directly to it.

Discretely Presented Component Units

Discrete presentation of component units refers to the method of reporting financial data of component units in a column(s) and row(s) separate from the financial data of the primary government.

When component units are presented in the basic financial statements (i.e., Statement of Net Assets and Statement of Activities), each statement should distinguish between the governmental and business-type activities of the government and between the total entity and its discretely presented component units, by reporting each in separate columns (and rows in the Statement of Activities). Component units that are fiduciary in nature, however, should be included only in the fund financial statements with the entity's fiduciary funds.

Statement 39 provides that a discrete presentation must be used for an organization that meets the requirements as a component unit under its new criteria. (Statement 39, paragraph 7)

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An entity's financial statements are an important element in conveying the current state, financial health, and future viability of the organization. Financial statements, regardless of the industry, report on a number of similar components, including assets, liabilities, and equity (i.e., fund balances or net assets). School districts and other governmental agencies are no exception.

The GASB is the oversight body responsible for establishing the governmental reporting criteria, including the level of detail, format, and required contents of external financial statements. GASB provides much guidance in the proper interpretation and implementation of these requirements. Readers are encouraged to refer to this source for further questions on financial reporting issues not covered in this document.

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