April 2002

Note Disclosures for Governments

By Edward M. Klasny, CPA, and Roberta E. Reese, CPA

Until recently, the Governmental Accounting Standards Board (GASB) has generally considered note disclosures only as they relate to other pronouncements on governmental accounting and reporting issues. Now, after a comprehensive review of disclosure requirements that were in effect in 1994 but not a part of other projects, comes GASB 38, Certain Financial Statements Note Disclosures, which fills the gaps where disclosure requirements were missing, clarifies requirements where standards were not detailed, and discards requirements that have outlived their usefulness. GASB 38 also contains nonauthoratative illustrations of the new disclosure requirements (see Exhibit 1 and Exhibit 2). Notably, the pre-1994 disclosures for deposits and investments, other post-employment benefits, and the reporting entity were excluded from consideration because of conflicts with other GASB projects or potential projects.

The New Disclosures

Activities in the funds replace generic fund-type descriptions. The focus of the fund financial statements in post–GASB 34 financial statements is major funds rather than fund types. Readers of financial statements are better served by descriptions of the specific activities rather than general accounting text boilerplate. Some titles of major funds may be sufficient to meet the requirement, making repetition in the notes unnecessary.

The window for recognition of revenues in the governmental funds should be disclosed. Governments have some latitude in deciding whether to record uncollected receivables at year-end as revenue in governmental funds. Readers of financial statements will see whether a government’s recognition policy is aggressive or conservative. Governments might want to evaluate whether their revenue recognition policy is appropriate in the current economic environment.

The disclosure of the accounting policy for encumbrances is no longer required, because there are no alternatives for accounting for encumbrances.
Disclosure of violations of finance-related legal or contractual provisions now needs to be accompanied by a description of the actions taken to address them. This information provides a better understanding of the impact of the violation on the government. The disclosure should be limited to the facts. Omit speculation about the effect of the actions taken.

Details of debt service requirements to maturity have been clarified. Principal requirements should be presented separately from interest requirements. Debt service for each of the five succeeding years should also be presented individually, with debt service thereafter presented in five-year increments, which will allow significant unevenness in payment schedules to be identified (Exhibit 1). Aggregation into five-year increments is the minimum disclosure requirement; some governments will choose to present each year individually.

Specific disclosures for variable-rate debt have been identified. Interest requirements should be computed using the effective rate at year-end, and the terms by which rates change should be disclosed. Use of variable-rate debt has been increasing, and governments’ current disclosures vary widely (Exhibit 1). Debt service requirement schedules should be set up to easily accommodate rate changes.

Short-term debt disclosure has been clarified to include a schedule of changes in short-term debt and the purpose of the borrowing. Short-term debt activity does not appear in the Statement of Activities or the Statement of Revenues, Expenditures, and Changes in Fund Balance, yet is important for evaluating the financial health of a government. This disclosure requirement applies even if no short-term debt is outstanding at year-end. The party responsible for cash management, usually part of the treasury, will likely be the best source of the information needed to meet this requirement (especially the purpose of the borrowing).

Major components of receivable and payable balances, along with noncurrent receivables, should be disclosed. Current standards do not address the level of detail required to be presented in the Statements of Net Assets and the Balance Sheet. Some governments provide detailed components, while others present only a single amount. For most governments, only the two or three largest components need to be disclosed, and the requirement can usually easily be met by providing the additional detail on the face of the financial statements. GASB 38 generally allows flexibility with respect to the nature of the major components of receivables and payables. For receivable balances, however, the amount not expected to be collected in the subsequent year should be disclosed.

The disclosure of interfund balances has been clarified to identify, for individual interfund receivables, the specific fund or fund group that owes the balance. Disclosure of the underlying purpose for interfund balances is also required. Readers of financial statements have tried, often unsuccessfully, to decipher which fund owes the balance and why the balance exists at year-end. Materiality is an important factor. Disclosures of small balances should be consolidated. There are likely common themes behind why balances arose; for example, routine sales of goods and services between funds, or loans for capital purchases.

The disclosure requirements for interfund transfers have three components:

Transfers have long been a source of mystery. Current reports often do not match transfers in to transfers out. For readers of financial statements to evaluate the likelihood of a transfer continuing into subsequent years, they need to know the source of the transfer (Exhibit 2).

Again, immaterial transactions should be consolidated. A well-designed accounting system will capture the identity of the fund matching each transfer in. Authorizing legislation, budget documents, or governing board resolutions can help identify the purpose of transfers.

Planning and Implementation

Generally, the provisions of GASB 38 are effective when a government is required to implement GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Government. The planning to prepare and audit these disclosure requirements should be integrated with the planning for GASB 34.

GASB’s future projects will also address note disclosures. The exposure draft on other post-employment benefits, scheduled to be issued in June 2002, is expected to include proposals for additional disclosure requirements. GASB’s deposit and investment risk project will reevaluate the continuing need for the disclosures required by GASB 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, including those related to custodial credit risk. The project will also consider whether disclosure of other risks associated with deposits and investments, such as market, credit, and liquidity risks, should be required.

Edward M. Klasny, CPA, is a member of the GASB, a retired partner of Ernst & Whinney (now Ernst & Young, LLP), and a past chairman of the AICPA Government Accounting and Auditing Committee (GAAC).
Roberta E. Reese, CPA, is a project manager with the GASB and a former member of the GAO Advisory Council on Government Auditing Standards. The views expressed in this article are those of the authors. Official positions of the GASB are determined only after extensive due process and deliberations of the board.

Thomas W. Morris
The CPA Journal

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