FINANCIAL MANAGEMENT/Meeting MD&A requirements
Statement No. 34 from the Government Accounting Standards Board brings local governments into the world of full accrual-based accounting, with a mandate for clear, concise financial reporting. For the first time, governments must establish a dollar value for their infrastructure and track depreciation of specific infrastructure items year to year. They also must allocate expenses and revenues to allow calculation of net costs for individual programs.
Furthermore, GASB 34 requires government financial managers to prepare a Management’s Discussion and Analysis (MD&A). For some financial managers, preparing an up-front summary of their government’s financial state of affairs could appear just as daunting as the accounting itself.
The purpose of the MD&A is to clearly communicate a government’s financial performance to all constituents. (The MD&A does not replace the Letter of Transmittal required by the Government Financial Officers Association.)
The minimum elements of the disclosure, defined in paragraph 11 of GASB 34, include: * a brief discussion of the basic financial statements, including the relationships between the government-wide and fund-level statements; * a two-year comparison of financial performance using government-wide financial information about assets, liabilities, revenues and expenses; * an analysis of the government’s overall financial position and results of its operations (to assist users in assessing whether the financial position has improved or deteriorated as a result of the current year’s operations); * an explanation of significant changes in fund-based financial results; * descriptions of significant capital asset and long-term debt activity during the year; * explanations of significant variations between original and final budget amounts and between final budget amounts and actual budget results for the general fund; * a discussion of facts, decisions or conditions that could significantly affect the government’s future financial position and operations; and * a discussion of significant changes in the assessed condition from previous condition assessments; how the current assessed condition compares with the established condition level; and significant differences in estimated and actual amounts to maintain/preserve infrastructure assets (applies only to governments that use the “modified approach” to report infrastructure assets).
Financial managers might regard the MD&A as the “Cliffs Notes” of the government’s financial and operational performance. It should provide the reader with a thorough – yet concise – explanation of events, progress and change during the fiscal year.
Much of the financial information needed for the MD&A is identical to that needed for the basic financial statements. However, financial managers should not wait until the statements are complete to prepare the MD&A. The analysis portion, in particular, is best prepared with input from executive offices, departments and agencies; and early inclusion of those representatives is essential for developing a thorough and accurate report.
With Statement No. 34, GASB intends to bring government financial reports more in line with those of private companies. In fact, the executive summaries for corporate financial statements can serve as guides for preparing an MD&A. The disclosure makes governments accountable to everyone by providing taxpayers, businesses, regulators and funding sources with accurate analysis of government activities.
