Pitfalls to Avoid in Preparing Your Annual Comprehensive Financial Report

As you start work on your annual comprehensive financial report (ACFR), you have a lot to keep in mind. Whether you’re a first-time preparer or a seasoned veteran, mistakes happen. Let’s take a look at each part of the report to identify some of the most common errors in ACFRs so that hopefully you can avoid them.

The Cover of the Report

To avoid receiving a comment before the reviewer even opens your ACFR, be sure that your cover includes the following:

• Correct title: Make sure the title is Annual Comprehensive Financial Report.
• Name and State: Include both the name of your governmental entity AND the state in which the entity is located.
• Fiscal period: Identify the fiscal period that the report covers.

Management’s Discussion and Analysis

Designed to provide a narrative explanation of significant financial activity for the year, Management’s Discussion and Analysis (MD&A) is an important part of any government entity’s annual financial report. It is important to:

• Ensure the MD&A provides the ‘WHY’ behind increases and decreases. All too often, the MD&A provides the ‘what’ – “fund balance increased by $200,000,” but not the ‘why’ (the analysis). Other times, an MD&A will attempt to explain why, but will fall short. For example, an MD&A that explains that fund balance increased $200,000 because property taxes increased still hasn’t answered the ‘why.’ Was it because of a $10,000,000 increase in assessed valuation of real property, a $0.05 increase in the tax rate, or perhaps both?
• Provide the reason for significant changes in balances and transactions for each of your major funds.
• Ensure the explanations are logical. For example, indicating that “fund balance increased $225,000 due to an increase in expenditures” doesn’t make sense.
• Include an analysis of significant variations between original and final budget and final budget and actual for your general and major special revenue funds.
• Add discussions of capital assets and debt, including detail of current year activity.

Financial Statements

The most common error in the annual financial report is balances that don’t agree. Some examples include: Fund balance does not agree between the statement of revenues, expenditures and changes in fund balance and the balance sheet; individual line items such as accounts payable do not agree between the fund-level and government-wide financial statements; or an amount reported in the financial statements such as capital assets or long-term debt does not agree with the respective footnote.

When preparing your annual comprehensive financial report, make sure that all amounts reported in the MD&A, notes to the financial statements, required supplementary information and statistical sections agree with the financial statements, where applicable. Be sure to pay close attention during the review process to prevent these errors.

Some other items to remember are:

• Headers for balance sheets and statements of net position should be “as of” fiscal year-end while activity statements should be “for the year ended…”
• Use care in identifying unearned revenue and unavailable revenue. Unearned revenue is used to report resources received in advance of being earned; unavailable revenue, conversely, is reported as a deferred inflow of resources. Generally, resources reported as unearned revenue in governmental funds financial statements also should be reported as such on the government-wide level.
• Restricted fund balance should reconcile to restricted net position.

An area that has received increased scrutiny lately is the net investment in capital assets classification within net position. Michele Mark Levine, Government Finance Officers Association Director of Technical Services, addressed this topic in a webinar, Correctly Calculating Net Investment in Government Assets. She noted that, at a high level, the net investment in capital assets balance is equal to the sum of capital assets and capital deferred outflows of resources less the sum of capital liabilities and capital deferred inflows of resources. However, the calculation has proven challenging because of the wide variety of transactions and other events that must be considered.

Notes to the Financial Statements

Aside from amounts disclosed in footnotes not agreeing to amounts recorded in the financial statements, the most common errors identified in the notes are related to pension and OPEB plans, due to the complexity of these disclosures. Pension and OPEB disclosures should include all required elements, including details by plan type. The Texas Municipal Retirement System and other retirement systems annually provide suggested pension and OPEB note disclosures to assist in this area.

Another area of frequent comments relates to budgets. The notes to the financial statements should disclose which funds have legally adopted annual budgets, the legal level on control, and any violations of the budget. Make sure budgetary comparison schedules that demonstrate compliance with the legal level of control are presented for all governmental funds with a legally adopted annual budget.

Required Supplementary Information (RSI)

Most RSI comments are focused on pension and OPEB schedules, including:

• The schedule of changes in net pension/OPEB liability and related ratios should report activity for the plan’s measurement year, while the schedule of contributions should report activity for the employer’s fiscal year. This means that the two schedules will report different periods. Therefore, the covered payroll amounts should not be the same.
• Be sure to include notes to the schedules that discuss changes in assumptions and benefit terms, if any.

Statistical Section

Two frequent comments in the statistical section relate to the table that provides information on changes in fund balances of the governmental funds. Both are related to the calculation of debt service as a percentage of noncapital expenditures. First, debt services expenditures should include only principal and interest (no bond issuance costs). Second, when determining noncapital expenditures, be sure to deduct the related reconciling item from the fund level to government-wide financial statements, not the capital outlay line item from the statement of revenues, expenditures, and changes in fund balance.

Another area of frequent comment is the debt capacity tables. Outstanding debt in these tables should reconcile to the related footnotes to the financial statements and be reported net of unamortized premium/discounts on bonds.

Whether you are preparing an ACFR for the first time or are a seasoned pro, consider using the comprehensive general-purpose checklist available on the GFOA website. This checklist is used by GFOA staff and members of the GFOA Special Review Committee to determine compliance with generally accepted accounting principles (GAAP) as well as the requirements of GFOA’s Certificate of Achievement program.

As the old saying goes, the devil is in the details. By paying attention to these areas, you can avoid the stress of finding about errors the hard way: after the fact, when you receive your GFOA comments.

For more information about preparing your ACFR, contact us. We are here to help.

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