Nature of Government Financial Reporting - Essay Example

mрrеhеnsivе Аnnuаl Finаnсiаl Rероrt Briеfing Name: Institution: Due date: The main question for financial accounting for government agencies revolves around the intelligibility and accountability in the competent allotment of scarce public funds (Ruppel, 2009). The Statement No. 34 of Basic fiscal Statements and Management’s Discussion and Analysis for State and Local regime Agencies outlines new best practices and requirements for financial coverage in the U.S. These requirements were implemented in June 15, 1999 for subsequent fiscal years, and were aimed at restructuring the approach and design of presenting annual financial reports in a more comprehensive and easy to understand way for enhanced usability. This concept for Comprehensive Annual Financial Reporting (CAFR) identifies and reaffirms the most important objectives of annual financial statements for governments. This approach has been successfully adopted by public agencies all over the country, with some notable ones including Prince George’s County, Maryland, managing to win awards for excellence in financial reporting. This approach is necessitated by the different nature of government financial reporting with that of profit businesses. Concepts Underlying CAFR Although the basis for financial reporting and auditing may be universally similar, government accounting is distinctly different from accounting for profit businesses. However, specific parts of financial reporting in not for profit agencies plus the government’s use a different convention than that used by profit-oriented organizations. Profit organizations aim at maintaining a balance of revenues over expenses, while government agencies basically spend only and all of whatever revenue they get from the government (Benston, 2006). In terms of accounting for contributions, non-profit organizations lack a clear-cut convention for accounting for those that are tax exempt, as are many contributions by the government to the various public agencies. Accounting for large capital projects and depreciating assets over their useful life is not always clear in government agencies as opposed to the methods used in business financial reporting. The use of money basis and customized money basis in non-profit accounting is also different from profit accounting. The later normally uses an accrual basis to account for incomes and revenues incurred. Government reporting provides for functional expenditure categorization in terms of program services costs and sustaining activities as opposed to reporting them in a general expenses account as is the case for profit making organizations. The CAFR approach reaffirms already existing objectives and identifies new information that is important for the public agencies financial reporting process. The most conspicuous feature of this approach is reaffirming the requirements of the reporting of various funds. They are designed as a means of imposing restrictions on funds appropriation and tracking revenues and expenditures arising from particular activities (Engel, 2010). The focus on reporting of funds has been sharpened by the requirement of classifying the various funds in terms of the most important and taking in a government universal fund category. This is mainly in line with the requirement of providing financial reporting that facilitates accountability in government agencies. This is through providing clear and sufficient information as a form of compliance to the laws, rules and regulations. This adopts a similar approach to that used in government agency financing. Generally, operating results are measured in terms of cash in hand and other liquid assets, and expenses in terms of accruals to facilitate easier measurement of public service costs. Another existing objective affirmed in the new approach is the requirement for budgetary compliance as part of the accountability process. This entails establishing annual operating budgets and providing budgetary comparisons in the annual financial reporting, with a change requiring additional comparison to the government’s original budget. This is important in displaying the various revisions on the government budget and how they are reflected on the agency’s fiscal report, adding another analytical dimension and enhancing usefulness of the financial report. Under the CAFR approach, new information is required in financial reports pertaining to a discussion and analysis by management for the transactions, conditions and events relevant to the financial report. The management discussion and analysis (MD&A) presents to the readers an objective, easy to understand analysis of the overall financial performance of public agencies for the accounting period. The MD&A should provide a comprehensive assessment of the development or else weakening of the agency’s financial position for the year ended. The investigation will contain the government’s novel financial plan and annual financial statements by means of accretion bookkeeping. It measures both current and long-standing resources along with liabilities consisting of capital resources, infrastructure development and debt obligation. As a result, government yearly monetary coverage under this approach will include the new additional features of the MD&A; fundamental fiscal statements integrating regime wide budgets as well as fiscal reports, accrual basis accounting for cash flows and funds financial reporting. Case Study: Prince George’s County, Maryland Prince George’s County, Maryland is a metropolitan city in Washington and has a County Council to oversee management of public services and spending. The County Council is composed of a legislative arm, and an executive branch for county-level law enforcement and for managing the County’s business affairs. The County’s commitment to public programs and service provision has enabled the adoption of the “Path to Greatness” campaign in its 2011 budget dealing with areas of Public Safety, Education, Housing, Community and Economic Development. This has enabled the County’s recognition for excellent financial planning and reporting practices by Moody’s Investor Services Inc, Fitch Ratings, and S&P Rating Services alongside various government awards. In line with the important aspects outlined in the CAFR, the County includes an MD&A section in its June 2011annual financial reports, intended to serve as a start to the fiscal statements. Along with the Letter of Transmittal, the MD&A provides a narrative overview and analysis of the financial activities outlining the general financial points and results. The financial highlights state that the County’s net amounted to $1.5 billion over liabilities, representing an increase of $4.6 million from the previous year (Baker, 2011). The net assets of government activities decreased by 2.1million while those from business kind activity increasing by $6.7 million. The governmental funds had an ending balance of $529.1 million, an increase of $29.8 m. All this is indicative of an enhanced financial point for the Council. For that year’s reporting, regime wide monetary statements prepared included: a statement of net assets, and a statement of activities, appearing on pages 17 and 18 of the report. These showed the change in the net assets and liabilities position, and the underlying activities giving rise to that change. The statements are indicative of the distinction between the functions supported by taxes and intergovernmental revenues, referred to as primary government activities, and business kind activities from user fees and charges. CAFR requires separate fund financial statements for the various governmental and proprietary funds, which group linked accounts used in maintaining control over resources segregated for specific objectives. The fund accounts for the County government have been divided into governmental, proprietary and fiduciary. Governmental funds statements contained on pages 19 – 24 account for near-term cash flows and balances of spendable resources. They provide a narrower focus than that in the government-wide statements, enabling the discernment of the longer-term impact of near-term financial decisions. The proprietary funds are divided into enterprise and internal services, contained on pages 25 – 29. Enterprise funds report business kind activities accounting for waste and sewage management, which are major sources of funds for the County. Internal service cash report for cost allocation and accumulation include self-insurance, vehicle maintenance and computer services. Fiduciary fund accounts contained on pages 30 and 31, account for funds maintained to benefit parties outside the County government so they are unavailable for supporting programs inside the County. Necessary additional information has been presented in the County’s financial statements to provide the comparison with past performances and budgetary estimates for the government-wide and fund statements. The explanations to the fiscal statements, contained on pages 33 – 92, avail a more wholesome understanding for the data used in the financial statements by showing past statistical information and account results for comparison with current results (Baker, 2011). Other information relates to the process of funding for the various Trust Finds sustained by the County, which is included on pages 93 – 95. The report has also included a breakdown of the combined and individual statements, schedules presenting additional details of the General, Non-Major Governmental, Internal Services and Fiduciary funds, and other non-major units, all which are contained on pages 97 – 135 of the report. References Baker, R. (2011). Prince George’s County, Maryland Comprehensive Annual Financial Report, 2010-2011. Maryland: Office of Finance, Prince George’s County. Alexander, D & Britton, A. (2004). Financial reporting. London: Thomson Learning. Benston, G.J. (2006). Worldwide Financial Reporting: The Development and Future of Accounting Standards. New York: Oxford University Press. Ruppel, W. (2009). Governmental Accounting Made Easy. New Jersey: John Wiley & Sons, Inc. Engel, G.T. (2010). Understanding the Primary Components of the Annual Financial. 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