A summary reconciliation of the government-wide and fund financial statements

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.

Table 5. GASB Statement 34-Contents of a Comprehensive Annual Financial ReportContents of the CAFR Under the New Reporting Model per Statement 34Contents of the CAFR Under the Previous Reporting ModelINTRODUCTORY CHAPTER

Table of Contents

Letter of Transmittal
GFOA Certificate of Achievement
Organization Chart
Principal Officials
Other Material Deemed Appropriate by Management (if applicable)

FINANCIAL CHAPTER

Auditor's Report
Management's Discussion & Analysis

Basic Financial Statements
Governmentwide Financial Statements

Statement of Net Assets
Statement of Activities

Fund Financial Statements

Governmental Funds
Balance Sheet
Statement of Revenues, Expenditures, and Changes in Fund Balances

Reconciliation to Governmentwide Statements

Proprietary Funds
Statement of Net Assets
Statement of Revenues, Expenses, and Changes in Net Assets
Reconciliation to Governmentwide Statements (if applicable)
Statement of Cash Flows (using the direct method)

Fiduciary Funds (and similar Component Units)
Statement of Fiduciary Net Assets
Statement of Changes in Fiduciary Net Assets

Discretely Presented Component Units
Fund Financial Statements as RSI if component unit does not issue separate financial statements

INTRODUCTORY CHAPTER

Table of Contents

Other Material Deemed Appropriate by Management (if applicable)
Letter of Transmittal
GFOA Certificate of Achievement
Organization Chart
Principal Officials

FINANCIAL CHAPTER

Auditor's Report

General Purpose Financial Statements (GPFS):

Combined Balance Sheet—All Fund Types, Account Groups, and Discretely Presented Component Units

Combined Statement of Revenues, Expenditures, and Changes in Fund Balances-All Governmental Fund Types and Discretely Presented Component Units

Combined Statement of Revenues, Expenditures, and Changes in Fund Balances—Budget and Actual—Governmental fund types of the primary government for which an annual budget has been legally adopted

Combined Statement of Revenues, Expenses, and Changes in Retained Earnings (or Equity)—All Proprietary Fund Types and Discretely Presented Component Units

Combined Statement of Cash Flows—All Proprietary Fund Types and Discretely Presented Component Units

Trust Funds may be reported as above as appropriate or may be reported separately

Notes to Financial Statements

General Disclosure Requirements (Similar to Notes to Financial Statements per the old reporting model as applicable)

Additional Disclosures in Summary of Significant Accounting Policies
(Paragraph 115 of GASB Statement 34)
Definition of operating and nonoperating revenues

Description of governmentwide financial statements including measurement focus & basis of accounting used

Government's policy for applying restricted and unrestricted resources

Description of types of transactions included in program revenues, policies for allocating indirect expenses to functions and elimination of internal activity in the statement of activities

Description of modified approach, if applicable

Policy for asset capitalization and estimation of useful lives

GASB 20 policy for proprietary funds and governmentwide activities

Additional Disclosures in Summary of Significant Accounting Policies Required by GASB Statement 38

Activities accounted for in major funds, internal service, and fiduciary fund types columns

Length of time used to define "available" for revenue recognition

Required Disclosures about Capital Assets
(Paragraphs 116-120 of the Statement)

Separately disclosed for governmental and business-type activities: Beginning and ending balances and acquisitions and dispositions for the year for each major class of capital asset and the related accumulated depreciation reported

Required Disclosures on Non-capitalized Assets (Paragraph 118)

Historical collections that are not capitalized should be described and reasons for not capitalizing should be provided

Required Disclosures on Long-term Liabilities
(Paragraphs 116-120 of the Statement)
Beginning and ending balances and increases and decreases for the year for each major long-term liability

Additional disclosure is required for portion of items due within one year

Information on governmental funds that have liquidated the long-term operating liabilities in the past

Notes to Financial Statements

Two types of disclosure are necessary in the CAFR
Notes to the financial statements that are essential for fair presentation of the GPFS (Combined Statements—Overview) level

Narrative explanations

Notes Essential to the Fair Presentation of GPFS include

Summary of Significant Accounting Policies
Description of the component units of the financial reporting entity and their relationships to the primary government
Revenue recognition policies
Encumbrance accounting and reporting methods
Policies for reporting infrastructure
Policies for capitalization of interest on fixed assets
Definition of cash and cash equivalents
Policy regarding use of FASB pronouncements for proprietary activities
Cashing deposits with Financial Institutions

Investments

Significant contingent liabilities

Encumbrances outstanding

Significant effects of subsequent events

Pension plan obligations

Accumulated unpaid employees benefits, such as vacation and sick leave

Material violations of finance-related legal and contractual provisions

Schedule of debt service requirements to maturity

Commitments under noncapitalized leases

Construction and other significant commitments

Changes in general fixed assets
Changes in general long-term debt

Any excess of expenditures over appropriations in individual funds

Changes in general long-term debt

Any excess of expenditures over appropriation in individual funds

Deficit fund balance or retained earnings of individual funds

Interfund receivable and payables

Disclosures for Donor-Restricted Endowments
(Paragraph 121 of the Statement)

Amounts of net appreciation on investment available for authorization for expenditure

How the amounts are reported in net assets

State Law relating to ability to spend net appreciation

Policy for authorizing and spending investment income

Segment Reporting
(Paragraph 122 of the Statement)

Provision of Condensed Financial Statements in the Notes:
Types of goods or 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

GASB Statement 38—Violations and actions taken regarding finance-related legal or contractual provisions
Variable-rate debt service on debt and lease obligations
Short-term debt activity
Disaggregation of receivable/payable balances
Interfund Balances and transfers

Narrative Explanations

Narrative explanations of combining, individual fund, account group, and component unit statements and schedules should provide information not included in the financial statements, notes to the financial statements, and schedules that is necessary to

• ensure an understanding of the combining and individual statements and schedules, and
• demonstrate compliance with finance-related legal and contractual provisions.

Segment Information for Enterprise Funds

Enterprise fund segment disclosures are required if

• material long-term liabilities are outstanding, "
• the disclosures are essential to ensure the GPFS are not misleading, or
• they are necessary to ensure interperiod comparability.

Required Supplementary Information (RSI) Other Than MD&A

BUDGETARY COMPARISON SCHEDULES
(Paragraphs 130 and 131 of Statement 34; see comment below)

Original and final appropriated budget
Actual amounts (Budgetary basis)
Column to report the variance between the final budget and actual amounts is encouraged, a column to report the variance between the original and final budgets is allowed

Required Supplementary Information (RSI)

Required supplementary information consists of statements, schedules, statistical data, or other information that GASB has determined is necessary to supplement, although not required to be a part of, the general purpose financial statements of a governmental entity.

COMBINING AND INDIVIDUAL FUND STATEMENTS

Combining statements are limited to nonmajor funds and are not required under GASB Statement 34

COMBINING AND INDIVIDUAL FUND AND ACCOUNT GROUP STATEMENTS AND SCHEDULES

Combining Statements
By Fund Type when a governmental unit has more than one fund of a given fund type

For Discretely Presented Component Units when the reporting entity has more than one component unit

Individual Fund and Account Group Statements
When a governmental unit (including blended component units) has only one fund type & for account groups or when necessary to present prior year and budgetary comparisons

Schedules
To demonstrate finance-related legal and contractual compliance
To present information spread throughout the statements that can be brought together and shown in greater detail
To present in greater detail information reported in the statements

STATISTICAL CHAPTER

The following statistical tables should be included in the CAFR unless clearly inapplicable in the circumstances:

Governmentwide Revenues and Expenses

General Governmental Expenditures by Function

General Revenues by Source

Property Tax Levies and Collections

Assessed and Estimated Actual Value of Taxable Property

Property Tax Rates—All Overlapping Governments

Special Assessment Billings and Collections

Ratio of Net General Bonded Debt to Assessed Value and Net Bonded Debt per Capita

Computation of Legal Debt Margin

Computation of Overlapping Debt

Ratio of Annual Debt Service for General Bonded Debt to Total General Expenditures

Revenue Bond Coverage

Demographic Statistics

Property Value, Construction, and Bank Deposits

Principal Taxpayers

Miscellaneous Statistics

STATISTICAL CHAPTER

The following statistical tables should be included CAFR unless clearly inapplicable in the circumstances:

General Governmental Expenditures by Function

General Revenues by Source

Property Tax Levies and Collections

Assessed and Estimated Actual Value of Taxable Property

Property Tax Rates-All Overlapping Governments

Special Assessment Billings and Collections

Ratio of Net General Bonded Debt to Assessed Value and Net Bonded Debt per Capita

Computation of Legal Debt Margin, if not presented in the General Purpose Financial Statements

Computation of Overlapping Debt

Ratio of Annual Debt Service for General Bonded Debt to Total General Expenditures

Revenue Bond Coverage

Demographic Statistics

Property Value, Construction, and Bank Deposits

Principal Taxpayers

Miscellaneous Statistics

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As 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

Basic Financial Statements

Under the new financial reporting model, the basic financial statements are

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

The basic financial statements replace the combined general-purpose financial statements (GPFS) required by the former reporting model.

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.

GASB Statement 34 allows governments to elect to present budgetary comparison information as part of the basic financial statements, rather than as required supplemental information (RSI) (Statement 34, paragraphs 130 and 131).

The governmentwide financial statements are

• Statement of Net Assets and
• Statement of Activities.

Statement of Net Assets. The Statement of Net Assets presents the financial position of the governmental entity and its discretely presented component units. This statement is required to present all financial and capital resources on the accrual basis of accounting. Statement 34 encourages the use of a net assets format, which subtracts liabilities from assets to reflect the net assets, rather than the standard balance sheet format, which presents a total for assets equal to a total of liabilities and net assets. However, either presentation is acceptable.

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.

Table 6. Statement of Net Assets vs. Combined Balance SheetStatement of Net Assets Under the New Reporting ModelCombined Balance Sheet Required by the Previous Reporting ModelFocus is on governmental and business-type activities.Focus was on fund-type and account group reporting.Reporting is on economic resources measurement focus and accrual basis of accounting for all assets and liabilities.Reporting was on current financial resources measurement focus and modified accrual basis of accounting for governmental and similar trust funds and economic resources measurement focus and accrual basis of accounting for proprietary and similar trust funds.The statement includes general capital assets and general long-term liabilities.General fixed assets and general long-term liabilities were reported only in account groups.Infrastructure assets must be reported.The reporting of infrastructure assets was optional.

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.

Table 7. Distinguishing Between Governmental Activities and Business-Type ActivitiesGovernmental ActivitiesBusiness-Type ActivitiesActivities financed by taxes and intergovernmental revenues and other nonexchange revenuesActivities for which fees are charged to external parties for goods or servicesActivities reported in governmental funds and internal service funds as applicableActivities reported in Enterprise funds and internal service funds (as applicable)Internal clearing account funds (e.g., payroll-clearing accounts) should be reported in the governmental activities column. Funds used to account for tax collections on behalf of other entities should be accounted for in agency funds (fiduciary funds) and, therefore, be excluded from the governmentwide financial statements.

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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Table 8. Determining Liquidity of Assets and LiabilitiesAssetsLiabilitiesDetermined by how readily the asset is expected to be converted into cash and whether restrictions limit use of resourcesBased on maturity, or when cash is expected to be used for liquidationLiabilities whose average maturities are greater than one year should be reported in two components-the amount due within one year and the amount due in more than one year.

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

As outlined in the previous discussion, revenues must be categorized according to their purpose as either general or program revenues in the statement of activities.

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.

Table 9. Measurement Focus and Basis of Accounting for Financial StatementsFinancial StatementsMeasurement FocusBasis of AccountingGovernmentwide Financial StatementsEconomic ResourcesAccrualGovernmental Funds Financial StatementsCurrent Financial ResourcesModified AccrualProprietary Funds Financial StatementsEconomic ResourcesAccrualFiduciary Funds Financial StatementsEconomic ResourcesAccrual

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.

The requirement for additional significant accounting policy disclosure relates only to the governmentwide statements and essentially calls for descriptive comments about the elements, purposes, and scope of the statements of net assets and activities. The MD&A, in contrast, relates to both governmentwide and fund financial statements and is oriented more toward the relationship between the two.

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Required Disclosures for Capital Assets. Statement 34 requires disclosure of each major class of capital assets, including capitalized collections of works of art, historical treasures, and similar assets. Capital assets associated with governmental activities should be reported separately from those associated with business-type activities, capital assets being depreciated separately from those that are not being depreciated, and the valuation basis separately from accumulated depreciation. For each class, the following information should be presented, if applicable:

• 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

The disclosure should also contain a description of the noncapitalized collections of works of art and the reasons for noncapitalization of these assets.

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

Information about net pension obligations is required to be disclosed in a separate pension note using the requirements of GASB Statement 27, Accounting for Pensions by State and Local Governmental Employers.

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

Segment Disclosures. Section 2200 of GASB Codification, Comprehensive Annual Financial Report, requires presenting segment information for certain individual enterprise funds of the governmental entity, including its blended component units. The term segment in Section 2200 refers to an individual enterprise fund of a state or local government. GASB Statement 34 redefines the term segment, in relation to the needs of users for additional financial information, as an identifiable activity reported as or within an enterprise fund or other stand-alone entity for which one or more revenue bonds or other revenue-backed debt instruments are outstanding.

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

Additionally, GASB Statement 38, Certain Financial Statement Note Disclosures, expanded note disclosures within the summary of significant accounting policies to include (1) the activities accounted for in major funds, internal service funds, and fiduciary fund type columns and (2) disclosure of the period used to define "available" for revenue recognition purposes. Other disclosure requirements addressed by this statement include (1) violations of finance-related legal or contractual provisions; (2) debt service for debt and lease obligations; (3) short-term debt obligations; (4) disaggregation of receivable and payable balances; and (5) details of interfund balances and transfers.

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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).

The focus of the MD&A should be on the primary government. However, information on any discretely presented component units may be presented as well. GASB has stated that both the positive and negative aspects of the government's operations should be presented to inform the reader about whether the government is in better or worse financial condition than in the prior year. The focus should be on only significant or material items.

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.

Information that does not address the requirements above should not be included in the MD&A but instead may be reported as supplementary information or included in the letter of transmittal.

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.

Table 10. Important Distinctions Between MD&A and Letter of TransmittalMD&ALetter of TransmittalPresented as part of the Financial Chapter in the Comprehensive Annual Financial Report (CAFR).Presented as part of the Introductory Chapter in the Comprehensive Annual Financial Report (CAFR)Must present only topics required by GASB Statement 34Not limited to topics described in GASB standardsProvides a summary and analysis of the government's overall financial position and operationsHighly structured and requires information only on currently known facts, conditions, or decisionsProvides an opportunity to discuss future plans

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.

If a potential component unit does not meet either of the two tests above for financial accountability, an organization may still be included in the financial statements of the primary government based on the criterion that exclusion would result in a misleading or incomplete presentation of the financial reporting entity.

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)

This standard continues the requirement for inclusion of organizations based on the GASB Statement 14, paragraph 20 "misleading or incomplete" criterion but emphasizes that "financial integration" may also be a component of all of the aforementioned criteria. Additional guidance on evidence of financial integration is also provided in Statement 39.

Component units may be

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

GASB Statement 34 does not amend the definition of component units or the general reporting requirements.

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.

Some component units account for their activities in a single fund; others use all or several fund types. If a component unit is blended, the types of funds of the component unit should be blended with those of the primary government by including them in the appropriate combining statements of the primary government. However, because the primary government's general fund is usually the main operating fund and often is a focal point for report users, a general fund should be presented only for the primary government. The general fund of a blended component unit should be reported as a special revenue fund.

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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