Financial reporting is now required from two perspectives: (1) government-wide and (2) fund. In addition, Management's Discussion and Analysis (MD & A) now is required. Funds have been redefined and account groups have been eliminated. Major funds are reported instead of fund types. No doubt there will be significant implementation issues and questions that arise as governments hasten to conform to this new standard. This article is the first step toward understanding of the key changes.

GASB's Key Objectives of Financial Reporting
The key objectives of financial reporting were set forth by the GASB in Concepts Statement No. 1, issued in 1987. The purpose of a statement of objectives is to eliminate need for debate of underlying principles as new standards are developed. The GASB objectives note that financial reporting assists in fulfilling government's duty to be publicly accountable and should enable users to assess that accountability. To this end it should:

• Provide information to determine whether current-year revenues were sufficient to pay for current-year services. This objective refers to the concept of interperiod equity; that is, are current taxpayers paying for the services that they use?

• Demonstrate whether (a) resources were obtained and used in accordance with the entity's legally adopted budget and (b) entity is in compliance with other finance-related legal or contractual requirements.

• Provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity.

Fund statements will also have a new look. The combined balance sheet will display major funds rather than the traditional fund types. In addition, certain fund types are redefined. A new fund called the permanent fund is introduced and there is a new definition of the enterprise fund.

The MD & A must include the following elements:

• A brief description of the required financial statements for benefit of users unfamiliar with how they are prepared.

• Condensed financial information derived from government-wide financial statements.

• An analysis of the government's overall financial position and results of operations, including impact of important economic factors. For example, rising real estate values or other changes in the tax base are topics that might impact overall financial position.

• An analysis of balances and transactions of individual funds.

• An analysis of differences between original and final budgeted amounts and between actual and budgeted amounts. The traditional model reported differences between the actual results and the final (i.e. amended) budget values only. Must explain variances from budget.

• A description of changes in capital assets and long-term debt during the year and changes therein.

• A discussion of the condition of infrastructure assets. City officials must now explain why there are so many potholes in the streets and roads!

• A description of currently known facts, decisions or conditions that have, or are expected to have, a material effect on financial position or results of operations.

Government-wide financial statements consist of two statements:

1. a statement of net assets (equivalent to a balance sheet)
2. a statement of activities (equivalent to an income statement)

Significant features of the statement of net assets:

• Reports all capital and financial resources.
• Presents assets and liabilities in order of relative liquidity (although presentations are also acceptable).
• Displays the three components of net assets: invested in capital assets, net of related debt, restricted and unrestricted.

Restricted assets are those subject to constraints imposed externally or those imposed by law through constitutional provisions or enabling legislation. Applies only to restrictions imposed by outside forces or law. It does not include funds restricted in an informal way, such as reserves for a rainy day.

Unrestricted assets encompass all other resources - those that, as the title implies, are unrestricted. It includes resources that are designated by management for specified purposes.

Long-term debt is presented as a long-term liability.

The Government-wide Statement of Activities
The government-wide statement of activities may look unlike anything you have ever seen (See Exhibit). Nevertheless, the more you think about it, the more you realize how much sense it makes.

The following are features of government-wide statement of activities:

• Shows the net (expense) revenue of individual functions, highlighting the extent to which each function draws from general revenues.

• Separate columns indicate revenues and the expenses associated with each function.

• General revenues, contributions to endowments, special items and transfers are reported separately, below the total net expenses of the government's various functions.

• Expenses, except those that meet the definitions of special or extraordinary items should be reported by function. Extraordinary items are those that are unusual in nature and infrequent in occurrence. Special items are unusual transactions within the control of management.

• The "bottom line" indicates difference between the expenses and revenues (and other special items, such as transfers) is reported as "change in net assets for the period."

• Program revenues are those derived directly from program beneficiaries (e.g., user charges) and from restricted grants and contributions.

• General revenues are those from general taxes, from the government's investments, and from unrestricted grants and contributions.

• Interfund payable and receivables
• Internal service fund activities
• Various allocations of overhead

Internal service fund balances that are not eliminated are reported in the "governmental activities" column. Examples include situations in which not all of the costs have been transferred to other units. Internal service fund balances are generally reported as governmental rather than business-type activities (unless the internal service fund provides services mainly to proprietary funds).

Implementation Issues
Indirect costs do not have to be allocated among functions. They may be reported as "general government" or "support services," in effect, an additional function.

Depreciation should be included as a direct function expense when capital assets can be specifically identified with that program; otherwise it may be shown as a separate line item or as part of the "general government" function.

Depreciation expense for infrastructure should not be allocated to functions; it should be reported as a direct expense of the function (e.g., public works or transportation) that the government normally associates with capital outlays.

Interest on long-term debt normally should be considered an indirect expense. However, it may be considered a direct program expense if essential to the creation or continued existence of a particular program.

In Part Two of this series, Apostolou will address Governmental, Proprietary, and Fiduciary Fund Financial Statements.