Question

The CAFR for governments is important document.

a. What is a CAFR? What are its main components?

b. What is GAAP?

c. What is the purpose of GASB and what is its role with the CAFR?

d. Distinguish between cash, accrual and modified accrual accounting?

e. What is the definition of funds for governmental accounting?

f. Why is fund balance important?

Answer 1

Answer(a)

CAFR stands for Comprehensive Annual Financial Report . A CAFR is a set of financial statements for a state, municipality or other governmental entity that comply with the accounting requirements established by the Governmental Accounting Standards Board (GASB). It must be audited by an independent auditor using generally accepted government auditing standards.

The CAFR consists of three sections: Introductory, Financial and Statistical.

The Introductory section orients and guides the reader through the report. The Financial section presents the entity’s basic financial statements as well as notes to the statements and the independent auditors’ report. The Statistical section provides additional financial and statistical data, including data about financial trends that may better inform the reader about the government’s activities.

Answer (b):

Generally Accepted Accounting Principles (GAAP):

Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP when their accountants compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.

GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method. Internationally, the equivalent to GAAP in the United States is referred to as international financial reporting standards (IFRS). IFRS is followed in over 120 countries, including those in the European Union (EU).

Understanding GAAP

GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.

The ultimate goal of GAAP is ensure a company's financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company's financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.

These 10 general concepts can help you remember the main mission of GAAP:

1.) Principle of Regularity

The accountant has adhered to GAAP rules and regulations as a standard.

2.) Principle of Consistency

Accountants commit to applying the same standards throughout the reporting process to prevent errors or discrepancies. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards in the footnotes to the financial statements.

3.) Principle of Sincerity

The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.

4.) Principle of Permanence of Methods

The procedures used in financial reporting should be consistent.

5.) Principle of Non-Compensation

Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.

6.) Principle of Prudence

Emphasizing fact-based financial data representation that is not clouded by speculation.

7.) Principle of Continuity

While valuing assets, it should be assumed the business will continue to operate.

8.) Principle of Periodicity

Entries should be distributed across the appropriate periods of time. For example, revenue should be reported in its relevant accounting period.

9.) Principle of Materiality / Good Faith

Accountants must strive for full disclosure in financial reports.

10.) Principle of Utmost Good Faith

Derived from the Latin phrase “uberrimae fidei” used within the insurance industry. It presupposes that parties remain honest in all transactions.

Answer(c):

Established in 1984, the Governmental Accounting Standards Board (GASB) is the independent, private-sector organization based in Norwalk, Connecticut, that establishes accounting and financial reporting standards for U.S. state and local governments that follow Generally Accepted Accounting Principles (GAAP).

The GASB standards are recognized as authoritative by state and local governments, state Boards of Accountancy, and the American Institute of CPAs (AICPA). The GASB develops and issues accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information to taxpayers, public officials, investors, and others who use financial reports.

The Financial Accounting Foundation (FAF) supports and oversees the GASB. Established in 1972, the FAF is the independent, private-sector, not-for-profit organization based in Norwalk, Connecticut responsible for the oversight, administration, financing, and appointment of the GASB and the Financial Accounting Standards Board (FASB).

Role of CAFR with the GASB:

Comprehensive Annual Financial Report (CAFR) is a set of U.S. government financial statements comprising the financial report of a state, municipal or other governmental entity that complies with the accounting requirements promulgated by the Governmental Accounting Standards Board (GASB). GASB provides standards for the content of a CAFR in its annually updated publication Codification of Governmental Accounting and Financial Reporting Standards. The U.S. Federal Government adheres to standards determined by the Federal Accounting Standards Advisory Board (FASAB).

A CAFR is compiled by a state, municipal or other governmental accounting staff and audited by an external American Institute of Certified Public Accountants (AICPA) certified accounting firm utilizing GASB requirements. It is composed of three sections: Introductory, Financial and Statistical. It combines the financial information of fund accounting and Enterprise Authorities accounting.

Answer (d)

The main difference between cash,accrual and modified accrual accounting is been explained:

• Cash basis accounting recognizes transactions upon the exchange of cash. Expenses are not recognized until they are paid, and revenue is not recognized until payment has been received. That means that future obligations or anticipated revenues are not recorded in financial statements until the cash transaction has occurred.
• In contrast, accrual accounting recognizes expenses when they are incurred, regardless of the payment status of the charges, and records revenue when a legal obligation is created. This indicates the company has fulfilled an obligation and has earned the right to collect, say at the point when the goods are shipped or at the completion of a service.

Modified accrual accounting borrows elements from both cash and accrual accounting, depending on whether assets are long-term, such as fixed assets and long-term debt, or short-term, such as accounts receivable (AR) and inventory.

It revenues when they become available and measurable and, with a few exceptions, records expenditures when liabilities are incurred. Modified accrual accounting is commonly used by government agencies.