Academic journal article The Journal of Government Financial Management

The New Governmental Financial Reporting Model: What It Means for Analyzing Government Financial Condition

Academic journal article The Journal of Government Financial Management

The New Governmental Financial Reporting Model: What It Means for Analyzing Government Financial Condition

Article excerpt

Municipal financial analysts, government program financial managers, citizens, media and others who struggle to assess the financial condition of state and local governments are hampered by a lack of uniformity in financial condition indicators. The situation is, to some extent, caused by the format of government financial reports. Thus, the June 1999 issuance of Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments, should help. Because the standard is effective for large governments for years beginning after June 15, 2001, states and larger municipalities will soon be issuing financial reports with a new format. The most obvious change in government financial reports will be a new set of financial statements that present a financial overview of a government. We suggest specific financial ratios that can easily be constructed using the new financial statement formats. Our list is not exhaustive and we do not imply that other information should not be considered when evaluating financial condition. We merely provide a starting point for the evaluation.

For many reasons it is difficult to analyze the financial condition of state and local governments. The old financial reporting format evolved to provide accountability and stewardship information, but it lacks a financial overview of the government. It is based on fund types and it mixes different measurement focuses and bases of accounting across the fund types. The governmental fund types use the modified accrual basis of accounting and financial resources measurement focus, while the proprietary fund types use the full accrual basis of accounting and economic resources measurement focus. The fund information can be useful for specific purposes, such as monitoring spending, but it is not useful for evaluating the overall financial condition of a government.

The new GASB 34 financial reporting model will not change the nature of government and its inherent accountability for its financial activities. However, it will improve reporting by supplementing the fund information with government-wide financial information. Thus, users of the new government financial reports should be able to monitor spending and evaluate overall financial condition.

The New Governmental Financial Reporting Model

The centerpieces of Statement 34 are two government-wide financial statements and the requirement to present a management's discussion and analysis (MD&A) of financial condition. The MD&A should be particularly useful for highlighting important financial information and providing insights for further analysis of the information provided in the financial report.

The new Statement of Net Assets and Statement of Activities should help analysts deal with three vexing problems in the current fund-based financial statements. First, the inherent flexibility of fund accounting often results in governments reporting similar programs in different fund types or spread across multiple funds. This can seriously threaten an analyst's ability to make comparisons. The government-wide statements largely resolve this concern because the focus of the statements is on programs or functions, without regard to the government's fund structure.

Second, it is nearly impossible to aggregate the governmental and proprietary funds into meaningful totals for the entire government because they employ different measurement focuses and bases of accounting. The new government-wide financial statements use only the full accrual basis of accounting and economic resources measurement focus. Using the new format, an analyst is able to compute financial condition indicators for govemmental activities, business-type activities and the total government.

Third, analysts cannot get an accurate sense of the cost of basic government services using the fund-based model because governmental funds use the modified accrual basis of accounting and financial resources measurement focus. …

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