Issuers and accountants found that common reporting deficiencies found in annual financial statements include missing capital-related borrowing calculations and inconsistent pension terminology due to changes in accounting standard rules over the years.
In a Government Finance Officers Association webinar Tuesday, panelists detailed their common findings and mistakes in governments’ comprehensive annual financial reports.
One hiccup issuers face is how to calculate the net investment and capital asset calculation — a figure that includes capital assets, net of acclimated depreciation and are reduced by the outstanding balances of bonds, mortgages notes or other borrowings.
“The one thing that could be potentially be missed is the capital-related borrowings,” said Kevin Kemp, partner at BKD LLP, an accounting firm. “Some municipalities and public sector entities have issued pension bonds and things of that nature so just make sure that you’ve only included capital-related borrowings in that calculation.”
The deferred amount of refunding should be included in the net investment and capital asset calculation, Kemp said. Debt issued for capital purposes, however, should not be included in that calculation until it has been used to acquire capital assets.
Accrued interest or accrued interest payable is also often excluded from the calculation, Kemp said.
Categorization is also sometimes an issue among municipalities. Federal or state grants should be categorized in operating grants or capital grants, not both in an annual financial statement, Kemp said.
“With COVID-19 ongoing, more grant activity will be presented in financial statements in the near future,” Kemp said.
GFOA panelists also noted that larger governments have blended component units, which are very intertwined with its primary government that they are almost the same. Issuers don’t always include a complete analysis of why an entity is a blended component, a panelist said.
Terminology in the CAFR also are not always updated, said Susan Brown, finance and accounting services manager for the city of Gresham, Oregon.
“These are some common terminology that reviewers have found that aren’t updated sometimes,” Brown said. “So we have gone years calling something a certain thing and then a new standard comes along that changes its name.”
For example, net assets was changed to net position following the Governmental Accounting Standards Board No. 63 put into place in 2011. Also, net pensions versus OPEB (other post-employment benefits) obligations, which are now called pension liability or net OPEB liability.
“What I have found and what I’ve seen when reviewing CAFRs is people usually get it right on the face of the statements, but look for these same terms everywhere else in your CAFR,” Brown said. “So you use them in your MD&A (management discussion and analysis), you use them in your statistics, you use them in other places, so I often do a find and replace.”
Brown also noted that some issuers don’t match up debt capacity schedules to amounts reported in their financial statements.
“The things that are often missing are direct placement items or capital leases,” Brown said. “If you had a capital lease, did you include that in your long term debt?”
In the analysis sections in the CAFR, Brown said she noticed some governments will not give a reason for changes made. For example, if the general fund changes by $10 million, what caused that change?
“One thing I’ve seen a lot is people will quantify the change, but they never explain it,” Brown said. “My general statement is if I have to ask why, you’re not done yet.”
