Comprehensive Annual Financial Report
Reporting on the government spending is one of the ways of ensuringthat government and its agencies are utilising the fund given to themin the interest of all stakeholders. Like the government agencies,all the governmental business organizations are required by the lawto report on their annual performance. In the United States,reporting of the financial and other related plans and statisticsmust comply with the financial preparation standards as set out bythe Governmental Accounting Standards Board. GASB is anon-governmental (private) organization which is mandated to issuethe GAAP (Generally Accepted Accounting Principles) used in theUnited States by the government entities to prepare their annualreports. GASB activities are overseeing by the Financial AccountingFoundation. The Mission of GASB is to improve and create standards ofaccounting in local and state governments which will make financialreports be resourceful information to the users. “Government entityand agencies give their Comprehensive Financial report annually”(Gibson 2013, p.4).
By definition, comprehensive annual financial report is the set ofstatements that are issued by a municipal, state and governmententities indicating the financial and other performance of thereporting unit in the year under consideration. These governmentreports are prepared according to the GASB standards. The standardsensure comparability between different entities, regions andauthorities. “GASB updates these standards on an annual basis anddocuments them in their annual publication that indicates all thestandards and effective changes. CAFR is usually prepared by theaccounting departments of each government entity” (Fischer, Taylor& Cheng, 2012, p.8). In order to enhance their reliability, everyCAFR is required to be audited by the auditing firm which iscertified by the American Institute of Certified Public Accountants.This paper will analyse the importance of the CAFR and have anoutlook of its key components.
Importance of CAFR
CAFR is prepared not only to fulfil the statutory obligation, but toalso serve various purposes to the investors, public and many otherinterested parties. The supreme aim of this report is to offerinformation on how the state or city officials are managing thepublic funds. Reporting on this official fund management helps tokeep them accountable and responsible in the management of the fundthey manage. Other purposes of the CAFR include:
Winning Citizens confidence: public is informed about the manner inwhich the state or city government is utilising the public fund.Citizens are able to scrutinize the trustworthiness of publicofficials. This is used as the major element of reinstate the publicofficers in office during the general election. Winning the publicconfidence helps to grow the economy of the state or the municipal.The CAFR is prepared with the same GAAP. This allows for comparisonbetween the performances of different individuals in differentgovernment entities. “As such, the performance of these individualscan be easily appraised based on performance of others” (Gibson,2013, p.10).
Encourage investment: rational investors invest their money in thepromising economies and entities. The CAFR helps to reveal theinformation, the past, and the present financial performance of aparticular region or government entity. Basing their analysis on thehistorical, current and projected performances and policies of thestate or municipal government, the investors are able to determinethe magnitude of risk that they potential investment will face. If anarea has the authorities that manage the public fund well, moreinvestors will invest in that area or entity which will develop theeconomy of the area and this improves the standard of living of thepeople in that area.
Keeping Public Informed: government, government entities andagencies have assets that members of the public do not have knowledgeabout. CAFR serves to bridge this information GAP. When the membersof the public are informed about the wealth of the municipal orstate, they are able to make rational investment or electiondecisions. Release of information helps the government when it wantsto solicit funds internally. When government is doing internalborrowing, the public uses the information from the CAFR to projectthe expected future performance and the plans of the government.“When they understand how the authority wants to use the fund, themunicipal or state government can get enough money from internalinvestors and financial institutions” (Fischer, Taylor & Cheng,2012, p.9). CAFR shows the investments and comparative information.Government or municipal government presents its budget before thebeginning of the financial year. In the budget, the state or themunicipal states are expenditures and sources of revenue. CAFR servesas a paramount metric of gauging the extent to which the entityimplemented its budget. This helps to rate the work of the officialswho were serving in the implementation of the state or municipalgovernment. As such the CAFR helps to report on how the agreed budgetfor a specific financial year, has been followed and the benefitsthat the members of public have accrued from the implementation ofthe budget.
Components of CAFR
CAFR is omnibus reports that are prepared in a peculiar uniformformat. The uniformity assists in auditing and analysing theinformation. CAFR contains different segments that includeintroductory report, Financials segment, Investment part, Actuarialportion and statistical part. These elements of the CAFR are brieflyillustrated below.
The introduction of the CAFR contains general information about thestate and manner in which the report has been prepared. “This partserves to introduce the user of the report to the entity or authoritythat has prepared the financial reports” (Gibson, 2013. p.10). Inmany cases the introductory part contains messages from the seniorofficials in the entity of agency, the management structure of thisentity, the members of the board list and messages (if it is agovernment entity) and other vital information that entails theentity for the year under consideration. This part contained theinformation on various awards and achievements that the state,municipal or government agencies has received or attained in thefiscal year.
This is one of the most crucial segments of the CAFR. This part hasthree main areas, that is, financial report, investments andinvestment actuarial. This area deals with indicating how the stateor the party under consideration has used the funds that are at itsdisposure. This part contains the legislative auditor’s report. Thereport indicates the standards that have been the financial reportspreparation, whether the standards used are up to date and whetherthe entity has applied all the accounting thresholds in thepreparation of the report. “The auditor’s report is eitherqualifying (stating that the reports do not reflect fairly theentity’ operations) or unqualified (indicating that the entitystatements are true and fair). The auditor helps to build thereports` reliability” (Gibson, 2013, p.12). Analysis and discussionof the management is another part of the financials. This partindicates the analysis of the entity’s performance based on thepresent and the historical report. The analysis entails how theentity or government organ has been performing, the financial trends,the reason behind a particular trend movement and the steps that aretaken to mitigate downward trends and encourage upward trend.
Financials segment contains the basic financial statements, that is,the statement of the fiduciary net statement position (or entities)and the statement of change in the fiduciary net position. Astatement of the position in the fiduciary net statement indicatesthe assets and the liabilities of the government organ or entity.This contains both physical and contractual assets. The liabilitiesindicate the extent to which the government organ has funded itsprojects and initiates using the debt. On the other hand, thestatement of the changes in the net fiduciary net positions shows howthe assets and the liabilities of the entity under consideration havechanged over the time. Notes to the financial statements are given toclarify any issue that is not well expressed in the financialstatements.
The financials segment also contains other information such as therequired supplementary information. This information indicates thefunding progress, the contribution of the employees and the notes tothe supplemental information. The supplementary information informsthe user of the financial statements on how the state or themunicipal authorities have funded different programs and thecontribution of the employees in the development of the state. “Thefinancials are accompanied by various schedules that indicate amongstother things, expenses in the investments, payments made to variousparties such as consultants and the administrative costs” (Ruppel,2013, p.16). The financial statements are used by the investors toknow have the state is using the public fund and how they assets havechanged over the period under consideration.
The investment part of the CAFR gives an account of the investmentsmade by the municipal or the state. This part has such components asinvestment report, asset allocation, investment results, the list ofthe largest assets that are held, the fair value of the investmentsand the investment fee. Investment report gives an overview of themanner in which the investment portfolio is distributed and thereason behind the diversification. The asset allocation shows how thestate, municipal or entity has allocated its assets to variousfunctions. The investment results indicate the returns that eachinvestment generated to the state or the municipal on the given timeperiod.
A list of the largest assets shows the main concentration of thestate’s wealth and its importance is to show where the governmenthas utilised much of its money. The fair value of the investmentindicates the amount of fund that the government or its unit can getby disposing of the held investment. The segment on the investmentfee is given to show the amount of money that has been paid in theinvestment, in relation to the returns that have acquired. “Theinvestment segment of the report is used by the investment analysisto advice the government or the entity on how it can effectivelyspread its portfolio to realize high value” (Gibson, 2013, p.19).
The actuarial section shows the analysis of the government on itsemployees and liabilities. The section contains the actuarialcertification note or letter, the summary of the methods that havebeen used in the actuarial, the evaluation of the actuarial value ofliabilities and assets, employees’ evaluations and various assetssolvency tests. The certification actuarial letter gives reliabilityof the report to the users by assuring them that the actuarialadopted are as per the requirement and they are in line with thecurrent eventualities in the economic performance. The actuarialassets and, liabilities value shows the method used by the state orthe municipal has value its assets and liabilities. This gives thejustification of the value that is attached to each asset orliability.
The solvency test is used to determine the liquidity of the partyunder consideration. The methods used in the actuarial are indicatedin order to allow for verification by the private and other users ofthe financial report. The actuarial section also shows data on theretirees, current employees and active members. The informationincludes their valuation and the sample of annual rates per givennumber of employees. “This data is useful in rating the value ofdifferent positions in the government or municipal which helps isstructuring the government” (Ruppel, 2013, p.22). The professionalsmostly use the actuarial part of the CAFR as the general public lackknowledge on the complex methods used to value and assess variousassets.
This section shows the statistics and calculation of all thefunctions in the government. The section is unique to a particularregion or entity. The other part of the report is mainly given insummary. The statistical part elaborates all the other sections byshowing how various figures have been arrived at. The sectionincludes the illustration of changes in the fiduciary net positionand the refunds and the benefits categorisation. The net positionchange indicates how the position of various assets and liabilitieshave changed over time. This is further represented graphical, inschedules in and in future graphical projections. The categorizationof benefits and refunds indicates each type of the benefits that wasawarded by the government or municipal authority and the refunds thatthey got from the dispensed amount.
The statistical report indicates in detail other programs undertakenby the government and their expenses or revenue obtained. The revenueand expenses from all the major activities are also indicated againsthistorical data. Other vital information included in this section ofthe report might include the number of the employees and employers,the partners in various projects, major projects undertaken by thegovernment, analysis of the active members in various projects andother specific information that regard various activities. Thestatistical report is issued as a supplement to the other reports andis used to inform the users of the report on how the data used inother sections of the report have been obtained. “Statisticalreport is mostly used by the auditors to verify the genuinely ofvarious transactions and to develop an audit trail” (Fischer,Taylor & Cheng, 2012, p.21). Although complex methods are used togive the data in the statistical section, the information is usuallyrepresented in a way that can be easily understood.
CAFR is used in the analyses of the budget of the year underconsideration. However, they are different from the budget in thatthe budget is prepared `before the expenses are made while the CAFRreports on the expenses and the revenue that have already been usedor obtained. CAFR reports compare the amount budgeted and the actualamount. The budget is usually prepared to show the plans of specificgroupings of government department and agencies while the CAFR showshow each unit has spent either the amount disbursed to them or theamount acquired by them. The US government intends to converge itsCRF with the IFRS standards by the end of the year 2014. Theinternational financial reporting standards will allow thecomparability of the financial part of the CAFR with otherinternational regions.
CAFR is a very important tool of ensuring full disclosure and totalaccountability to the public officials. The CAFR is created at theend of each fiscal year and they help the users to evaluate thefuture prospects of the government unit or agency. It is veryimperative for the CAFR to be prepared in accordance with the GAAP asissued by the GASB to compare the performance of different entitiesacross the sectors. CAFR is useful not only to the unit preparingthem but also to the users located in the area under coverage andbeyond. State uses the CAFR as a basis for formulating fiscal andmonetary policies. In conclusion, every government unit or agency isobliged by both law and social values to present their CAFR in a trueand fair manner and to give a true reflection of the social,environmental and economic performance of the public offices.
Fischer, P., Taylor, W. & Cheng, R. (2012). Advancedaccounting. Mason, OH: South- Western Cengage Learning.
Gibson, C. (2013). Financial reporting & analysis: usingfinancial accounting information. Mason, Ohio: South-Western.
Ruppel, W. (2013). Wiley GAAP for Governments 2013 Interpretationand Application of Generally Accepted Accounting Principles for Stateand Local Governments. New York: Wiley.