Statement No. 34 of theGovernmental Accounting

Standards Board

Basic Financial Statementsand Managements Discussion

and Analysisfor State andLocal Governments

NO. 171-A JUNE 1999 GovernmentalAccounting Standards Series

GOVERNMENTAL ACCOUNTING STANDARDS BOARDOF THE FINANCIAL ACCOUNTING FOUNDATION

For additional copies of this Statement and information on applicable prices anddiscount rates, contact:

Order DepartmentGovernmental Accounting Standards Board401 Merritt 7P.O. Box 5116Norwalk, CT 06856-5116

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Please ask for our Product Code No. GS34.

The GASB web site can be accessed at www.gasb.org.

Preface

This Statement establishes new financial reporting requirements for stateand local governments throughout the United States. When implemented, it willcreate new information and will restructure much of the information that gov-ernments have presented in the past. We developed these new requirements tomake annual reports more comprehensive and easier to understand and use.

The GASBs first concepts Statement,* issued in 1987 after extensive dueprocess, identifies what we believe are the most important objectives of finan-cial reporting by governments. Some of those objectives reaffirm the impor-tance of information that governments already include in their annual reports.Other objectives point to a need for new information. For this reason, thisStatement requires governments to retain some of the information they cur-rently report, but also requires them to reach beyond the familiar to new anddifferent information. This Statement will result in reports that accomplish manyof the objectives we emphasized in that concepts Statement.

Retaining the Familiar

Annual reports currently provide information about funds. Most funds areestablished by governing bodies (such as state legislatures, city councils, orschool boards) to show restrictions on the planned use of resources or tomeasure, in the short term, the revenues and expenditures arising from certainactivities. Concepts Statement 1 noted that annual reports should allow usersto assess a governments accountability by assisting them in determiningcompliance with finance-related laws, rules, and regulations. For this reasonand others, this Statement requires governments to continue to present finan-cial statements that provide information about funds. The focus of these state-ments has been sharpened, however, by requiring governments to reportinformation about their most important, or major, funds, including a govern-ments general fund. In current annual reports, fund information is reported inthe aggregate by fund type, which often makes it difficult for users to assessaccountability.

Fund statements also will continue to measure and report the operatingresults of many funds by measuring cash on hand and other assets that caneasily be converted to cash. These statements show the performancein theshort termof individual funds using the same measures that many governmentsuse when financing their current operations. For example, if a government issuesfifteen-year debt to build a school, it does not collect taxes in the first yearsufficient to repay the entire debt; it levies and collects what is needed to make

*GASB Concepts Statement No. 1, Objectives of Financial Reporting.

that years required payments. On the other hand, when governments charge afee to users for servicesas is done for most water or electric utilitiesfundinformation will continue to be based on accrual accounting (discussed below) sothat all costs of providing services are measured.

Showing budgetary compliance is an important component of governmentsaccountability. Many citizensregardless of their professionparticipate in theprocess of establishing the original annual operating budgets of state and localgovernments. Governments will be required to continue to provide budgetarycomparison information in their annual reports. An important change, however, isthe requirement to add the governments original budget to that comparison.Many governments revise their original budgets over the course of the year for avariety of reasons. Requiring governments to report their original budget inaddition to their revised budget adds a new analytical dimension and increasesthe usefulness of the budgetary comparison. Budgetary changes are not, by theirnature, undesirable. However, we believe that the information will be importantin the interest of accountabilityto those who are aware of, and perhaps madedecisions based on, the original budget. It will also allow users to assess thegovernments ability to estimate and manage its general resources.

Bringing in New Information

The financial managers of governments are knowledgeable about the trans-actions, events, and conditions that are reflected in the governments financialreport and of the fiscal policies that govern its operations. For the first time,those financial managers will be asked to share their insights in a requiredmanagements discussion and analysis (referred to as MD&A) by giving readersan objective and easily readable analysis of the governments financial per-formance for the year. This analysis should provide users with the informationthey need to help them assess whether the governments financial position hasimproved or deteriorated as a result of the years operations.

Financial managers also will be in a better position to provide this analysisbecause for the first time the annual report will also include new government-wide financial statements, prepared using accrual accounting for all of thegovernments activities. Most governmental utilities and private-sector compa-nies use accrual accounting. It measures not just current assets and liabilitiesbut also long-term assets and liabilities (such as capital assets, includinginfrastructure, and general obligation debt). It also reports all revenues and allcosts of providing services each year, not just those received or paid in thecurrent year or soon after year-end.

These government-wide financial statements will help users:

Assess the finances of the government in its entirety, including the yearsoperating results

Determine whether the governments overall financial position improved ordeteriorated

Evaluate whether the governments current-year revenues were sufficient topay for current-year services

See the cost of providing services to its citizenry See how the government finances its programsthrough user fees and

other program revenues versus general tax revenues Understand the extent to which the government has invested in capital

assets, including roads, bridges, and other infrastructure assets Make better comparisons between governments.

In short, the new annual reports should give government officials a new andmore comprehensive way to demonstrate their stewardship in the long term inaddition to the way they currently demonstrate their stewardship in the shortterm and through the budgetary process.

* * *

The GASB expresses its thanks to the thousands of preparers, auditors,academics, and users of governmental financial statements who have partici-pated during the past decade in the research, consideration, and deliberationsthat have preceded the publication of this Statement. We especially appreciatethe input of those who participated by becoming members of our various taskforces, which began work on this and related projects as early as 1985.

The GASB is responsible for developing standards of state and local govern-mental accounting and financial reporting that will (a) result in useful informa-tion for users of financial reports and (b) guide and educate the public,including issuers, auditors, and users of those financial reports. We have anopen decision-making process that encourages broad public participation.

Summary

This Statement establishes financial reporting standards for state and localgovernments, including states, cities, towns, villages, and special-purposegovernments such as school districts and public utilities. It establishes that thebasic financial statements and required supplementary information (RSI) forgeneral purpose governments should consist of:

Managements discussion and analysis (MD&A). MD&A should introduce thebasic financial statements and provide an analytical overview of the govern-ments financial activities. Although it is RSI, governments are required topresent MD&A before the basic financial statements.

Basic financial statements. The basic financial statements should include: Government-wide financial statements, consisting of a statement of net

assets and a statement of activities. Prepared using the economic re-sources measurement focus and the accrual basis of accounting, thesestatements should report all of the assets, liabilities, revenues, expenses,and gains and losses of the government. Each statement should distin-guish between the governmental and business-type activities of the pri-mary government and between the total primary government and itsdiscretely presented component units by reporting each in separate col-umns. Fiduciary activities, whose resources are not available to financethe governments programs, should be excluded from the government-wide statements.

Fund financial statements consist of a series of statements that focus oninformation about the governments major governmental and enterprisefunds, including its blended component units. Fund financial statementsalso should report information about a governments fiduciary funds andcomponent units that are fiduciary in nature. Governmental fund financialstatements (including financial data for the general fund and specialrevenue, capital projects, debt service, and permanent funds) should beprepared using the current financial resources measurement focus andthe modified accrual basis of accounting. Proprietary fund financial state-ments (including financial data for enterprise and internal service funds)and fiduciary fund financial statements (including financial data for fidu-ciary funds and similar component units) should be prepared using theeconomic resources measurement focus and the accrual basis of ac-counting.

Notes to the financial statements consist of notes that provide informationthat is essential to a users understanding of the basic financial statements.

Required supplementary information (RSI). In addition to MD&A, this State-ment requires budgetary comparison schedules to be presented as RSIalong with other types of data as required by previous GASB pronounce-ments. This Statement also requires RSI for governments that use themodified approach for reporting infrastructure assets.

Special-purpose governments that are engaged in only governmental activi-ties (such as some library districts) or that are engaged in both governmentaland business-type activities (such as some school districts) generally should bereported in the same manner as general purpose governments. Special-purpose governments engaged only in business-type activities (such as utili-ties) should present the financial statements required for enterprise funds,including MD&A and other RSI.

Important Aspects of MD&A

MD&A should provide an objective and easily readable analysis of thegovernments financial activities based on currently known facts, decisions, orconditions. MD&A should include comparisons of the current year to the prioryear based on the government-wide information. It should provide an analysisof the governments overall financial position and results of operations to assistusers in assessing whether that financial position has improved or deterioratedas a result of the years activities. In addition, it should provide an analysis ofsignificant changes that occur in funds and significant budget variances. Itshould also describe capital asset and long-term debt activity during the year.MD&A should conclude with a description of currently known facts, decisions, orconditions that are expected to have a significant effect on financial position orresults of operations.

Important Aspects of the Government-wide Financial Statements

Governments should report all capital assets, including infrastructure assets, inthe government-wide statement of net assets and generally should report depre-ciation expense in the statement of activities. Infrastructure assets that are part ofa network or subsystem of a network are not required to be depreciated as longas the government manages those assets using an asset management systemthat has certain characteristics and the government can document that theassets are being preserved approximately at (or above) a condition level estab-lished and disclosed by the government.

The net assets of a government should be reported in three categoriesinvested in capital assets net of related debt, restricted, and unrestricted. ThisStatement provides a definition of the term restricted. Permanent endowmentsor permanent fund principal amounts included in restricted net assets should bedisplayed in two additional componentsexpendable and nonexpendable.

The government-wide statement of activities should be presented in a formatthat reports expenses reduced by program revenues, resulting in a measure-ment of net (expense) revenue for each of the governments functions.Program expenses should include all direct expenses. General revenues, suchas taxes, and special and extraordinary items should be reported separately,ultimately arriving at the change in net assets for the period. Special items aresignificant transactions or other events that are either unusual or infrequent andare within the control of management.

Important Aspects of the Fund Financial Statements

To report additional and detailed information about the primary government,separate fund financial statements should be presented for governmental andproprietary funds. Required governmental fund statements are a balance sheetand a statement of revenues, expenditures, and changes in fund balances.Required proprietary fund statements are a statement of net assets; a statementof revenues, expenses, and changes in fund net assets; and a statement ofcash flows. To allow users to assess the relationship between fund andgovernment-wide financial statements, governments should present a sum-mary reconciliation to the government-wide financial statements at the bottomof the fund financial statements or in an accompanying schedule.

Each of the fund statements should report separate columns for the generalfund and for other major governmental and enterprise funds. Major funds arefunds whose revenues, expenditures/expenses, assets, or liabilities (excludingextraordinary items) are at least 10 percent of corresponding totals for allgovernmental or enterprise funds and at least 5 percent of the aggregateamount for all governmental and enterprise funds. Any other fund may bereported as a major fund if the governments officials believe that fund isparticularly important to financial statement users. Nonmajor funds should bereported in the aggregate in a separate column. Internal service funds alsoshould be reported in the aggregate in a separate column on the proprietaryfund statements.

Fund balances for governmental funds should be segregated into reservedand unreserved categories. Proprietary fund net assets should be reported inthe same categories required for the government-wide financial statements.Proprietary fund statements of net assets should distinguish between currentand noncurrent assets and liabilities and should display restricted assets.

Proprietary fund statements of revenues, expenses, and changes in fund netassets should distinguish between operating and nonoperating revenues andexpenses. These statements should also report capital contributions, contribu-tions to permanent and term endowments, special and extraordinary items, andtransfers separately at the bottom of the statement to arrive at the all-inclusivechange in fund net assets. Cash flows statements should be prepared using thedirect method.

Separate fiduciary fund statements (including component units that are fidu-ciary in nature) also should be presented as part of the fund financial state-ments. Fiduciary funds should be used to report assets that are held in a trusteeor agency capacity for others and that cannot be used to support the govern-ments own programs. Required fiduciary fund statements are a statement offiduciary net assets and a statement of changes in fiduciary net assets.

Interfund activity includes interfund loans, interfund services provided andused, and interfund transfers. This activity should be reported separately in thefund financial statements and generally should be eliminated in the aggregatedgovernment-wide financial statements.

Required Supplementary Information

To demonstrate whether resources were obtained and used in accordancewith the governments legally adopted budget, RSI should include budgetarycomparison schedules for the general fund and for each major special revenuefund that has a legally adopted annual budget. The budgetary comparisonschedules should present both (a) the original and (b) the final appropriatedbudgets for the reporting period as well as (c) actual inflows, outflows, andbalances, stated on the governments budgetary basis. This Statement alsorequires RSI for governments that use the modified approach for reportinginfrastructure assets.

Effective Date and Transition

The requirements of this Statement are effective in three phases based on agovernments total annual revenues in the first fiscal year ending after June 15,1999. Governments with total annual revenues (excluding extraordinary items)of $100 million or more (phase 1) should apply this Statement for periodsbeginning after June 15, 2001. Governments with at least $10 million but less

than $100 million in revenues (phase 2) should apply this Statement for periodsbeginning after June 15, 2002. Governments with less than $10 million inrevenues (phase 3) should apply this Statement for periods beginning afterJune 15, 2003. Earlier application is encouraged. Governments that elect earlyimplementation of this Statement for periods beginning before June 15, 2000,should also implement GASB Statement No. 33, Accounting and FinancialReporting for Nonexchange Transactions, at the same time. If a primary gov-ernment chooses early implementation of this Statement, all of its componentunits also should implement this standard early to provide the financial infor-mation required for the government-wide financial statements.

Prospective reporting of general infrastructure assets is required at theeffective dates of this Statement. Retroactive reporting of all major generalgovernmental infrastructure assets is encouraged at that date. For phase 1 andphase 2 governments, retroactive reporting is required four years after theeffective date on the basic provisions for all major general infrastructure assetsthat were acquired or significantly reconstructed, or that received significantimprovements, in fiscal years ending after June 30, 1980. Phase 3 governmentsare encouraged to report infrastructure retroactively, but may elect to reportgeneral infrastructure prospectively only.

Components of This Statement

This Statement consists of several components. The detailed authoritativestandards established by this Statement are presented in paragraphs 3 through166. Appendix C provides nonauthoritative illustrations of MD&A; the basicfinancial statements required for a variety of types of governments, such astowns, school districts, fire districts, and utilities; notes to those financial state-ments required by this Statement; and RSI other than MD&A. The reasons forthe Boards conclusions on the major issues are discussed in the Basis forConclusions (Appendix B). Appendix D summarizes how the new standardswould be incorporated into the GASBs June 30, 1999, Codification of Govern-mental Accounting and Financial Reporting Standards.

Unless otherwise specified, pronouncements of the GASB apply to finan-cial reports of all state and local governmental entities, including generalpurpose governments, public benefit corporations and authorities, publicemployee retirement systems, and public utilities, hospitals and otherhealthcare providers, and colleges and universities. Paragraph 3 dis-cusses the applicability of this Statement.

Basic Financial Statementsand Managements Discussion

and Analysisfor State andLocal Governments

June 1999

Statement No. 34 of theGovernmental Accounting

Standards Board

Governmental Accounting Standards Boardof the Financial Accounting Foundation

401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116

Copyright 1999 by Governmental Accounting Standards Board. All rights re-served. No part of this publication may be reproduced, stored in a retrieval system,or transmitted, in any form or by any means, electronic, mechanical, photocopying,recording, or otherwise, without the prior written permission of the GovernmentalAccounting Standards Board.

Copyright 1999 by Governmental Accounting Standards Board. All rights re-served. No part of this publication may be reproduced, stored in a retrieval system,or transmitted, in any form or by any means, electronic, mechanical, photocopying,recording, or otherwise, without the prior written permission of the GovernmentalAccounting Standards Board.

Statement No. 34 of the Governmental Accounting Standards Board

Basic Financial Statementsand Managements Discussion andAnalysisfor State and Local Governments

June 1999

CONTENTS

ParagraphNumbers

Introduction ............................................................................. 1 2Standards of Governmental Accounting and Financial Reporting .... 3141

Scope and Applicability ......................................................... 3 5Minimum Requirements for Basic Financial Statements

and Required Supplementary Information............................... 6 7Managements Discussion and Analysis (MD&A) ....................... 8 11Government-wide Financial Statements.................................... 12 62

Focus of the Government-wide Financial Statements.............. 13 15Measurement Focus and Basis of Accounting........................ 16 29

Reporting Capital Assets ................................................. 18 29Modified Approach ...................................................... 23 26Reporting Works of Art and Historical Treasures ............. 27 29

Required Financial StatementsStatement of Net Assets ....... 30 37Invested in Capital Assets, Net of Related Debt .................. 33Restricted Net Assets...................................................... 34 35Unrestricted Net Assets ................................................... 36 37

Required Financial StatementsStatement of Activities .......... 38 62Expenses ...................................................................... 41 46Revenues...................................................................... 47 53

Program Revenues ..................................................... 48 51General Revenues ...................................................... 52Reporting Contributions to Term and Permanent

Endowments, Contributions to Permanent Fund Principal,Special and Extraordinary Items, and Transfers............. 53

Statement of Activities Format.......................................... 54Special and Extraordinary Items ....................................... 55 56

ParagraphNumbers

Eliminations and Reclassifications .................................... 57 61Internal BalancesStatement of Net Assets ................... 58Internal ActivitiesStatement of Activities ...................... 59 60Intra-entity Activity....................................................... 61

Reporting Internal Service Fund Balances ......................... 62Fund Financial Statements ..................................................... 63112

FundsOverview and Definitions ........................................ 63 73Governmental Funds ...................................................... 64 65Proprietary Funds........................................................... 66 68Fiduciary Funds ............................................................. 69 73

Governmental and Proprietary Fund Financial Statements....... 74105Focus on Major Funds .................................................... 75 76Required Reconciliation to Government-wide Statements..... 77Required Financial StatementsGovernmental Funds ........ 78 90

Measurement Focus and Basis of Accounting ................. 79Reporting General Capital Assets.................................. 80Reporting General Long-term Liabilities ......................... 81 82Balance Sheet ............................................................ 83 84

Separate Display of Reserved and Unreserved FundBalance................................................................ 84

Required Reconciliation ............................................... 85Statement of Revenues, Expenditures, and Changes in

Fund Balances ......................................................... 86 90Classification of Revenues and Expenditures............... 87Other Financing Sources and Uses............................ 88Special and Extraordinary Items................................. 89Required Reconciliation ............................................ 90

Required Financial StatementsProprietary Funds ............. 91105Measurement Focus and Basis of Accounting ................. 92 95Separate Presentation of Internal Service Funds............. 96Statement of Net Assets............................................... 97 99

Reporting Restrictions on Asset Use .......................... 99Statement of Revenues, Expenses, and Changes in Fund

Net Assets ............................................................... 100104

ParagraphNumbers

Defining Operating Revenues and Expenses............... 102Reporting Capital Contributions and Additions

to Permanent and Term Endowments....................... 103Required Reconciliations .......................................... 104

Statement of Cash Flows ............................................. 105Required Financial StatementsFiduciary Funds and

Similar Component Units .................................................. 106111Measurement Focus and Basis of Accounting .................... 107Statement of Fiduciary Net Assets .................................... 108Statement of Changes in Fiduciary Net Assets ................... 109Reporting Agency Funds................................................. 110111

Reporting Interfund Activity ................................................. 112Basic Financial StatementsNotes to the Financial

Statements......................................................................... 113123General Disclosure Requirements ........................................ 114115Required Note Disclosures about Capital

Assets and Long-term Liabilities ........................................ 116120Disclosures about Donor-restricted Endowments .................... 121Segment Information.......................................................... 122123

Reporting Component Units ................................................... 124128Required Supplementary Information Other Than MD&A ............ 129133

Budgetary Comparison Schedules ....................................... 130131Modified Approach for Reporting Infrastructure ...................... 132133

Basic Financial Statements Required for Special-purposeGovernments...................................................................... 134141Reporting by Special-purpose Governments

Engaged in Governmental Activities ................................... 135137Reporting by Special-purpose Governments

Engaged Only in Business-type Activities............................ 138Reporting by Special-purpose Governments

Engaged Only in Fiduciary Activities................................... 139141Effective Date and Transition ..................................................... 142160

Governmental Entities That Use the AICPA Not-for-Profit Model .. 147Reporting General Infrastructure Assets at Transition................. 148151Modified Approach for Reporting Infrastructure Assets................ 152153

ParagraphNumbers

Initial Capitalization of General Infrastructure Assets .................. 154160Determining Major General Infrastructure Assets.................... 154156Establishing Capitalization at Transition ................................ 157160

Estimated Historical CostCurrent Replacement Cost ........ 158159Estimated Historical Cost from Existing Information............. 160

Methods for Calculating Depreciation .......................................... 161166Composite Methods .............................................................. 163166

Appendix A: Background ........................................................... 167178Appendix B: Basis for Conclusions.............................................. 179476Appendix C: Illustrations............................................................ 477Appendix D: Codification Instructions .......................................... 478

Statement No. 34 of the Governmental Accounting Standards Board

Basic Financial Statementsand Managements Discussion andAnalysisfor State and Local Governments

June 1999

INTRODUCTION

1. The objective of this Statement is to enhance the understandability andusefulness of the general purpose external financial reports of state and localgovernments to the citizenry, legislative and oversight bodies, and investorsand creditors. GASB Concepts Statement No. 1, Objectives of Financial Re-porting, recognizes these groups as the primary intended users of governmen-tal financial reports and establishes financial reporting objectives to meet theirinformation needs. Those objectives are the foundation for the standards in thisStatement.

2. Accountability is the paramount objective of governmental financialreportingthe objective from which all other financial reporting objectives flow.1

Governments duty to be accountable includes providing financial information thatis useful for economic, social, and political decisions. Financial reports thatcontribute to these decisions include information useful for (a) comparing actualfinancial results with the legally adopted budget, (b) assessing financial conditionand results of operations, (c) assisting in determining compliance with finance-related laws, rules, and regulations, and (d) assisting in evaluating efficiency andeffectiveness.2

1Concepts Statement 1, paragraphs 56 and 76.2Concepts Statement 1, paragraph 32.

1

STANDARDS OF GOVERNMENTAL ACCOUNTING ANDFINANCIAL REPORTING

Scope and Applicability

3. This Statement establishes accounting and financial reporting standards forgeneral purpose external financial reporting by state and local governments.3 Itis written from the perspective of general purpose governmentsstates, cities,counties, towns, and villages. Specific financial reporting standards for special-purpose governments are established in paragraphs 134 through 141.

4. This Statement establishes specific standards for the basic financial state-ments, managements discussion and analysis (MD&A), and certain requiredsupplementary information (RSI) other than MD&A.

5. This Statement supersedes NCGA Statement 1, Governmental Accountingand Financial Reporting Principles, Summary Statement of Principles nos. 3, 6,and 7, paragraphs 19, 20, 3441, 4756, 60, 71, 74, 101106, 122, 131, 136,137, 140142, 144, 146154, 162164, and 166171, and footnote 4; NCGAStatement 2, Grant, Entitlement, and Shared Revenue Accounting by State andLocal Governments, paragraphs 15, 16, and 18; NCGA Statement 4, Accountingand Financial Reporting Principles for Claims and Judgments and CompensatedAbsences, paragraphs 57 and 3242; NCGA Statement 5, Accounting andFinancial Reporting Principles for Lease Agreements of State and Local Govern-ments, paragraphs 79; NCGA Interpretation 2, Segment Information for Enter-prise Funds; NCGA Interpretation 5, Authoritative Status of Governmental Ac-counting, Auditing, and Financial Reporting (1968); NCGA Interpretation 6, Notesto the Financial Statements Disclosure, paragraph 3; NCGA Interpretation 10,State and Local Government Budgetary Reporting, paragraph 12; AICPA State-ment of Position 77-2, Accounting for Interfund Transfers of State and LocalGovernments; AICPA Statement of Position 78-7, Financial Accounting and Re-porting by Hospitals Operated by a Governmental Unit; GASB Statement No. 7,Advance Refundings Resulting in Defeasance of Debt, paragraph 9 and footnote1; GASB Statement No. 11, Measurement Focus and Basis of AccountingGovernmental Fund Operating Statements, paragraphs 139, 6276, and 8199;GASB Statement No. 14, The Financial Reporting Entity, paragraphs 4547, 49,

3The scope of this Statement excludes public colleges and universities. A revised ExposureDraft, Basic Financial Statementsand Managements Discussion and Analysisfor PublicColleges and Universities, issued June 30, 1999, proposes standards for public colleges anduniversities.

2

56, and 57; GASB Statement No. 17, Measurement Focus and Basis ofAccountingGovernmental Fund Operating Statements: Amendment of the Ef-fective Dates of GASB Statement No. 11 and Related Statements, para-graphs 13 and 5; GASB Statement No. 20, Accounting and Financial Reportingfor Proprietary Funds and Other Governmental Entities That Use ProprietaryFund Accounting, footnote 1; GASB Statement No. 21, Accounting for EscheatProperty, paragraph 6; and GASB Statement No. 29, The Use of Not-for-ProfitAccounting and Financial Reporting Principles by Governmental Entities, para-graphs 1, 3, 4, and 6. In addition, this Statement amends NCGA Statement 1,Summary Statement of Principles nos. 1, 2, 5, 810, and 12 and paragraphs 24,1618, 22, 2527, 30, 32, 33, 4244, 46, 57, 59, 61, 72, 99, 100, 107, 128, 129,135, 138, 139, 145, 155159, 173, and 175; NCGA Statement 4, paragraphs 6,13, 16, and 17; NCGA Statement 5, paragraphs 5, 6, 10, 11, and 1417; NCGAInterpretation 3, Revenue RecognitionProperty Taxes, paragraph 3; NCGAInterpretation 6, paragraphs 2, 4, 5, and 8; NCGA Interpretation 8, CertainPension Matters, paragraph 12; NCGA Interpretation 9, Certain Fund Classifica-tions and Balance Sheet Accounts, paragraphs 9 and 12; NCGA Interpreta-tion 10, paragraphs 11, 14, 15, and 25; GASB Statement No. 1, AuthoritativeStatus of NCGA Pronouncements and AICPA Industry Audit Guide, paragraph 8;GASB Statement No. 3, Deposits with Financial Institutions, Investments (includ-ing Repurchase Agreements), and Reverse Repurchase Agreements, para-graphs 64 and 65; GASB Statement No. 6, Accounting and Financial Reportingfor Special Assessments, paragraphs 13, 15, 17, 19, and 23; GASB Statement 7,paragraphs 1, 3, 7, 8, 10, 11, and 14; GASB Statement No. 8, Applicability ofFASB Statement No. 93, Recognition of Depreciation by Not-for-Profit Organi-zations, to Certain State and Local Governmental Entities, paragraphs 10 and 11and footnote 3; GASB Statement No. 9, Reporting Cash Flows of Proprietary andNonexpendable Trust Funds and Governmental Entities That Use ProprietaryFund Accounting, paragraphs 1, 5, 17, 18, 21, 22, and 3134; GASB StatementNo. 10, Accounting and Financial Reporting for Risk Financing and RelatedInsurance Issues, paragraphs 52, 53, 61, 6365, 6769, and 78 and footnote 12;GASB Statement No. 12, Disclosure of Information on Postemployment BenefitsOther Than Pension Benefits by State and Local Governmental Employers,paragraph 12; GASB Statement No. 13, Accounting for Operating Leases withScheduled Rent Increases, paragraphs 1, 4, 7, and 9; GASB Statement 14,paragraphs 9, 11, 12, 19, 42, 44, 5052, 54, 58, 63, 73, 74, and 131; GASBStatement No. 16, Accounting for Compensated Absences, paragraph 13; GASBStatement 17, paragraphs 4 and 6; GASB Statement No. 18, Accounting forMunicipal Solid Waste Landfill Closure and Postclosure Care Costs, para-graphs 3, 7, 10, 11, and 16 and footnote 2; GASB Statement 20, paragraphs 79;GASB Statement 21, paragraphs 35; GASB Statement No. 23, Accounting and

3

Financial Reporting for Refundings of Debt Reported by Proprietary Activities,paragraphs 1, 3, 4, and 6; GASB Statement No. 25, Financial Reporting forDefined Benefit Pension Plans and Note Disclosures for Defined ContributionPlans, paragraph 13 and footnote 9; GASB Statement No. 26, Financial Report-ing for Postemployment Healthcare Plans Administered by Defined Benefit Pen-sion Plans, paragraph 4 and footnote 4; GASB Statement No. 27, Accounting forPensions by State and Local Governmental Employers, paragraphs 1517, 19,23, and 25 and footnote 14; GASB Statement No. 28, Accounting and FinancialReporting for Securities Lending Transactions, paragraphs 3, 4, and 10 andfootnotes 3, 6, and 9; GASB Statement 29, paragraph 7; GASB StatementNo. 31, Accounting and Financial Reporting for Certain Investments and forExternal Investment Pools, paragraphs 7, 14, 18, and 19; GASB StatementNo. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457Deferred Compensation Plans, paragraph 4; GASB Statement No. 33, Account-ing and Financial Reporting for Nonexchange Transactions, paragraph 11; GASBInterpretation No. 1, Demand Bonds Issued by State and Local GovernmentalEntities, paragraphs 6, 10, and 13 and footnote 2; and GASB InterpretationNo. 4, Accounting and Financial Reporting for Capitalization Contributions toPublic Entity Risk Pools, paragraph 6.

Minimum Requirements for Basic Financial Statements and RequiredSupplementary Information

6. The minimum requirements for managements discussion and analysis(MD&A), basic financial statements, and required supplementary informationother than MD&A are:

a. Managements discussion and analysis. MD&A, a component of RSI, shouldintroduce the basic financial statements and provide an analytical overviewof the governments financial activities. (See paragraphs 811.)

b. Basic financial statements. The basic financial statements should include:(1) Government-wide financial statements. The government-wide state-

ments should display information about the reporting government as awhole, except for its fiduciary activities. The statements should includeseparate columns for the governmental and business-type activities ofthe primary government4 as well as for its component units. Govern-ment-wide financial statements should be prepared using the economicresources measurement focus and the accrual basis of accounting. (Seeparagraphs 1262.)

4Unless otherwise noted, the term primary government includes the primary government and itsblended component units, as defined in Statement 14.

4

(2) Fund financial statements. Fund financial statements for the primarygovernments governmental, proprietary, and fiduciary funds should bepresented after the government-wide statements. These statementsdisplay information about major funds individually and nonmajor funds inthe aggregate for governmental and enterprise funds. Fiduciary state-ments should include financial information for fiduciary funds and similarcomponent units. Each of the three fund categories should be reportedusing the measurement focus and basis of accounting required for thatcategory. (See paragraphs 63112.)

(3) Notes to the financial statements. (See paragraphs 113123.)c. Required supplementary information other than MD&A. Except for MD&A,

required supplementary information, including the required budgetary com-parison information, should be presented immediately following the notes tothe financial statements.5 (See paragraphs 129133.)

7. The following diagram illustrates the minimum requirements for generalpurpose external financial statements.

5This paragraph does not modify the provisions of GASB Statement No. 30, Risk FinancingOmnibus, paragraph 7.

5

Managements Discussion and Analysis (MD&A)

8. The basic financial statements should be preceded by MD&A, which isrequired supplementary information (RSI). MD&A should provide an objectiveand easily readable analysis of the governments financial activities based oncurrently known6 facts, decisions, or conditions. The financial managers ofgovernments are knowledgeable about the transactions, events, and conditionsthat are reflected in the governments financial report and of the fiscal policiesthat govern its operations. MD&A provides financial managers with the oppor-tunity to present both a short- and a long-term analysis of the governmentsactivities.7

9. MD&A should discuss the current-year results in comparison with the prioryear, with emphasis on the current year. This fact-based analysis shoulddiscuss the positive and negative aspects of the comparison with the prior year.The use of charts, graphs, and tables is encouraged to enhance the under-standability of the information.

10. MD&A should focus on the primary government. Comments in MD&Ashould distinguish between information pertaining to the primary governmentand that of its component units. Determining whether to discuss matters relatedto a component unit is a matter of professional judgment and should be basedon the individual component units significance to the total of all discretelypresented component units and that component units relationship with theprimary government. When appropriate, the reporting entitys MD&A shouldrefer readers to the component units separately issued financial statements.

11. MD&A requirements established by this Statement are general rather thanspecific to encourage financial managers to effectively report only the mostrelevant information and avoid boilerplate discussion. At a minimum, MD&Ashould include:

a. A brief discussion of the basic financial statements, including the relation-ships of the statements to each other, and the significant differences in theinformation they provide. This discussion should include analyses that assist

6For purposes of MD&A, currently known facts are information that management is aware of asof the date of the auditors report.7If a letter of transmittal is presented in the introductory section of a comprehensive annualfinancial report (CAFR), governments are encouraged not to duplicate information contained inMD&A.

6

readers in understanding why measurements and results reported in fundfinancial statements either reinforce information in government-wide state-ments or provide additional information.

b. Condensed financial information derived from government-wide financialstatements comparing the current year to the prior year. At a minimum,governments should present the information needed to support their analy-sis of financial position and results of operations required in c, below,including these elements:(1) Total assets, distinguishing between capital and other assets(2) Total liabilities, distinguishing between long-term liabilities and other

liabilities(3) Total net assets, distinguishing among amounts invested in capital as-

sets, net of related debt; restricted amounts; and unrestricted amounts(4) Program revenues, by major source(5) General revenues, by major source(6) Total revenues(7) Program expenses, at a minimum by function(8) Total expenses(9) Excess (deficiency) before contributions to term and permanent endow-

ments or permanent fund principal, special and extraordinary items, andtransfers

(10) Contributions(11) Special and extraordinary items(12) Transfers(13) Change in net assets(14) Ending net assets

c. An analysis of the governments overall financial position and results ofoperations to assist users in assessing whether financial position has im-proved or deteriorated as a result of the years operations. The analysisshould address both governmental and business-type activities as reportedin the government-wide financial statements and should include reasons forsignificant changes from the prior year, not simply the amounts or percent-ages of change. In addition, important economic factors, such as changes inthe tax or employment bases, that significantly affected operating results forthe year should be discussed.

d. An analysis of balances and transactions of individual funds. The analysisshould address the reasons for significant changes in fund balances or fundnet assets and whether restrictions, commitments, or other limitations sig-nificantly affect the availability of fund resources for future use.

7

e. An analysis of significant variations between original and final budgetamounts and between final budget amounts and actual budget results for thegeneral fund (or its equivalent). The analysis should include any currentlyknown reasons for those variations that are expected to have a significanteffect on future services or liquidity.

f. A description of significant capital asset and long-term debt activity8 duringthe year, including a discussion of commitments made for capital expendi-tures, changes in credit ratings, and debt limitations that may affect thefinancing of planned facilities or services.

g. A discussion by governments that use the modified approach (para-graphs 2325) to report some or all of their infrastructure assets including:(1) Significant changes in the assessed condition of eligible infrastructure

assets from previous condition assessments(2) How the current assessed condition compares with the condition level

the government has established(3) Any significant differences from the estimated annual amount to

maintain/preserve eligible infrastructure assets compared with the actualamounts spent during the current period.

h. A description of currently known facts,9 decisions, or conditions that areexpected to have a significant effect on financial position (net assets) orresults of operations (revenues, expenses, and other changes in net assets).

Government-wide Financial Statements

12. The government-wide financial statements consist of a statement of netassets and a statement of activities. Those statements should:

a. Report information about the overall government without displaying indi-vidual funds or fund types

b. Exclude information about fiduciary activities, including component units thatare fiduciary in nature (such as certain public employee retirement systems)

c. Distinguish between the primary government and its discretely presentedcomponent units

d. Distinguish between governmental activities and business-type activities ofthe primary government

8Paragraphs 116 through 120 require certain disclosures about capital assets and long-termdebt. It is sufficient for purposes of this discussion in MD&A to summarize that information andrefer to it for additional details.9See footnote 6.

8

e. Measure and report all assets (both financial and capital), liabilities, rev-enues, expenses, gains, and losses using the economic resources meas-urement focus and accrual basis of accounting.

Focus of the Government-wide Financial Statements

13. The statement of net assets and the statement of activities should displayinformation about the reporting government as a whole. The statements shouldinclude the primary government and its component units, except for the fidu-ciary funds of the primary government and component units that are fiduciary innature. Those funds and component units should be reported only in thestatements of fiduciary net assets and changes in fiduciary net assets. (Seeparagraphs 106111.)

14. The focus of the government-wide financial statements should be on theprimary government, as defined in Statement 14. Separate rows and columnsshould be used to distinguish between the total primary government and itsdiscretely presented component units. A total column should be presented forthe primary government. A total column for the entity as a whole may bepresented but is not required. Prior-year data may be presented in thegovernment-wide statements but also are not required.

15. Separate rows and columns also should be used to distinguish between thegovernmental and business-type activities10 of the primary government. Gov-ernmental activities generally are financed through taxes, intergovernmentalrevenues, and other nonexchange revenues. These activities are usually re-ported in governmental funds and internal service funds. Business-type activi-ties are financed in whole or in part by fees charged to external parties forgoods or services. These activities are usually reported in enterprise funds.

Measurement Focus and Basis of Accounting

16. The statement of net assets and the statement of activities should beprepared using the economic resources measurement focus and the accrualbasis of accounting. Revenues, expenses, gains, losses, assets, and liabilitiesresulting from exchange and exchange-like transactions should be recognized

10This paragraph is not intended to require segregation of activities into governmental andproprietary funds beyond what is currently reported by management of the government unlessthe activity is required to be reported as an enterprise fund, as discussed in paragraph 67.

9

when the exchange takes place.11 Revenues, expenses, gains, losses, assets,and liabilities resulting from nonexchange transactions should be recognized inaccordance with the requirements of Statement 33. (Additional guidance onreporting capital assets is discussed in paragraphs 18 through 29, below.)

17. Reporting for governmental and business-type activities should be basedon all applicable GASB pronouncements as well as the following pronounce-ments issued on or before November 30, 1989, unless those pronouncementsconflict with or contradict GASB pronouncements:

a. Financial Accounting Standards Board (FASB) Statements12 and Inter-pretations

b. Accounting Principles Board (APB) Opinions13

c. Accounting Research Bulletins (ARBs) of the Committee on AccountingProcedure.

Business-type activities may also apply FASB pronouncements issued afterNovember 30, 1989, as provided in paragraph 7 of GASB Statement 20, asamended by this Statement.

Reporting Capital Assets

18. Capital assets should be reported at historical cost. The cost of a capitalasset should include capitalized interest and ancillary charges necessary toplace the asset into its intended location and condition for use. Ancillary charges

11In this Statement, the terms transaction and transactions refer only to external events in whichsomething of value (benefit) passes between two or more parties. The difference betweenexchange and exchange-like transactions is a matter of degree. In contrast to a pure exchangetransaction, an exchange-like transaction is one in which the values exchanged, though related,may not be quite equal or in which the direct benefits may not be exclusively for the parties tothe transaction. Nevertheless, the exchange characteristics of the transaction are strong enoughto justify treating the transaction as an exchange for accounting recognition.12The provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types ofRegulation, only apply to governments that have qualifying enterprise funds.13Changes in accounting principles, addressed in APB Opinion No. 20, Accounting Changes, asamended, should be reported as restatements of beginning net assets/fund equity, not as aseparately identified cumulative effect in the current-period statement of activities or proprietaryfund statement of revenues, expenses, and changes in fund net assets.

10

include costs that are directly attributable to asset acquisitionsuch as freightand transportation charges, site preparation costs, and professional fees.Donated capital assets should be reported at their estimated fair value at thetime of acquisition plus ancillary charges, if any.

19. As used in this Statement, the term capital assets includes land, improve-ments to land, easements, buildings, building improvements, vehicles, machin-ery, equipment, works of art and historical treasures, infrastructure, and all othertangible or intangible assets that are used in operations and that have initialuseful lives extending beyond a single reporting period. Infrastructure assetsare long-lived capital assets that normally are stationary in nature and normallycan be preserved for a significantly greater number of years than most capitalassets. Examples of infrastructure assets include roads, bridges, tunnels, drain-age systems, water and sewer systems, dams, and lighting systems. Buildings,except those that are an ancillary part of a network of infrastructure assets,should not be considered infrastructure assets for purposes of this Statement.

20. Capital assets that are being or have been depreciated (paragraph 22)should be reported net of accumulated depreciation in the statement of netassets. (Accumulated depreciation may be reported on the face of the state-ment or disclosed in the notes.) Capital assets that are not being depreciated,such as land or infrastructure assets reported using the modified approach(paragraphs 23 through 25), should be reported separately if the governmenthas a significant amount of these assets. Capital assets also may be reportedin greater detail, such as by major class of asset (for example, infrastructure,buildings and improvements, vehicles, machinery and equipment). Requireddisclosures are discussed in paragraphs 116 and 117.

21. Capital assets should be depreciated over their estimated useful livesunless they are either inexhaustible or are infrastructure assets reported usingthe modified approach in paragraphs 23 through 25. Inexhaustible capitalassets such as land and land improvements should not be depreciated.

22. Depreciation expense should be reported in the statement of activitiesas discussed in paragraphs 44 and 45. Depreciation expense should bemeasured by allocating the net cost of depreciable assets (historical cost lessestimated salvage value) over their estimated useful lives in a systematic andrational manner. It may be calculated for (a) a class of assets, (b) a network of

11

assets,14 (c) a subsystem of a network,15 or (d) individual assets. (Compositemethods may be used to calculate depreciation expense. See paragraphs 161through 166 for a more complete discussion of depreciation.)

Modified approach

23. Infrastructure assets that are part of a network or subsystem of a network16

(hereafter, eligible infrastructure assets) are not required to be depreciated aslong as two requirements are met. First, the government manages the eligibleinfrastructure assets using an asset management system that has the charac-teristics set forth below; second, the government documents that the eligibleinfrastructure assets are being preserved approximately at (or above) a condi-tion level established and disclosed by the government.17 To meet the firstrequirement, the asset management system should:

a. Have an up-to-date inventory of eligible infrastructure assetsb. Perform condition assessments18 of the eligible infrastructure assets and

summarize the results using a measurement scalec. Estimate each year the annual amount to maintain and preserve the eligible

infrastructure assets at the condition level established and disclosed by thegovernment.

14A network of assets is composed of all assets that provide a particular type of service for agovernment. A network of infrastructure assets may be only one infrastructure asset that iscomposed of many components. For example, a network of infrastructure assets may be a damcomposed of a concrete dam, a concrete spillway, and a series of locks.15A subsystem of a network of assets is composed of all assets that make up a similar portionor segment of a network of assets. For example, all the roads of a government could beconsidered a network of infrastructure assets. Interstate highways, state highways, and ruralroads could each be considered a subsystem of that network.16If a government chooses not to depreciate a subsystem of infrastructure assets based on theprovisions of this paragraph, the characteristics of the asset management system required bythis paragraph and the documentary evidence required by paragraph 24 should be for thatsubsystem of infrastructure assets.17The condition level should be established and documented by administrative or executivepolicy, or by legislative action.18Condition assessments should be documented in such a manner that they can be replicated.Replicable condition assessments are those that are based on sufficiently understandable andcomplete measurement methods such that different measurers using the same methods wouldreach substantially similar results. Condition assessments may be performed by the governmentitself or by contract.

12

24. Determining what constitutes adequate documentary evidence to meet thesecond requirement in paragraph 23 for using the modified approach requiresprofessional judgment because of variations among governments asset man-agement systems and condition assessment methods. These factors also mayvary within governments for different eligible infrastructure assets. However,governments should document that:

a. Complete condition assessments of eligible infrastructure assets are per-formed in a consistent manner at least every three years.19

b. The results of the three most recent complete condition assessments pro-vide reasonable assurance that the eligible infrastructure assets are beingpreserved approximately at (or above) the condition level20 established anddisclosed by the government.

25. If eligible infrastructure assets meet the requirements of paragraphs 23and 24 and are not depreciated, all expenditures made for those assets (exceptfor additions and improvements) should be expensed in the period incurred.Additions and improvements to eligible infrastructure assets should be capital-ized. Additions or improvements increase the capacity or efficiency of infrastruc-ture assets rather than preserve the useful life of the assets.

26. If the requirements of paragraphs 23 and 24 are no longer met, thedepreciation requirements of paragraphs 21 and 22 should be applied forsubsequent reporting periods.21

Reporting works of art and historical treasures

27. Except as discussed in this paragraph, governments should capitalize worksof art, historical treasures, and similar assets at their historical cost or fair value atdate of donation (estimated if necessary) whether they are held as individual

19Condition assessments may be performed using statistical samples that are representative ofthe eligible infrastructure assets being preserved. Governments may choose to assess theireligible infrastructure assets on a cyclical basis. For example, one-third may be assessed eachyear. If a cyclical basis is used, a condition assessment is considered complete for a network orsubsystem only when condition assessments have been performed for all (or statistical samplesof) eligible infrastructure assets in that network or subsystem.20For example, condition could be measured either by a condition index or as the percentage ofa network of infrastructure assets in good or poor condition.21This change should be reported as a change in accounting estimate.

13

items or in a collection. Governments are encouraged, but not required, tocapitalize a collection (and all additions to that collection) whether donated orpurchased that meets all of the following conditions.22 The collection is:

a. Held for public exhibition, education, or research in furtherance of publicservice, rather than financial gain

b. Protected, kept unencumbered, cared for, and preservedc. Subject to an organizational policy that requires the proceeds from sales of

collection items to be used to acquire other items for collections.

Governments should disclose information about their works of art and historicalcollections as required by paragraph 118.

28. Recipient governments should recognize as revenues donations of worksof art, historical treasures, and similar assets, in accordance with Statement 33.When donated collection items are added to noncapitalized collections, gov-ernments should recognize program expense equal to the amount of revenuesrecognized.

29. Capitalized collections or individual items that are exhaustible, such asexhibits whose useful lives are diminished by display or educational or researchapplications, should be depreciated over their estimated useful lives. Deprecia-tion is not required for collections or individual items that are inexhaustible.

Required Financial StatementsStatement of Net Assets

30. The statement of net assets should report all financial and capital re-sources. Governments are encouraged to present the statement in a formatthat displays assets less liabilities equal net assets, although the traditionalbalance sheet format (assets equal liabilities plus net assets) may be used.Regardless of the format used, however, the statement of net assets shouldreport the difference between assets and liabilities as net assets, not fundbalances or equity.

22Collections already capitalized at June 30, 1999, should remain capitalized and all additions tothose collections should be capitalized, even if they meet the conditions for exemption fromcapitalization.

14

31. Governments are encouraged to present assets and liabilities in order oftheir relative liquidity.23 An assets liquidity should be determined by how readilyit is expected to be converted to cash and whether restrictions limit thegovernments ability to use the resources. A liabilitys liquidity is based on itsmaturity, or when cash is expected to be used to liquidate it. The liquidity of anasset or liability may be determined by assessing the average liquidity of theclass of assets or liabilities to which it belongs, even though individual balancesmay be significantly more or less liquid than others in the same class and someitems may have both current and long-term elements. Liabilities whose averagematurities are greater than one year should be reported in two componentsthe amount due within one year and the amount due in more than one year.Additional disclosures concerning long-term liabilities are discussed in para-graph 119.

32. The difference between a governments assets and its liabilities is its netassets. Net assets should be displayed in three componentsinvested incapital assets, net of related debt; restricted (distinguishing between majorcategories of restrictions); and unrestricted.

Invested in Capital Assets, Net of Related Debt

33. This component of net assets consists of capital assets (see paragraph 19),including restricted capital assets, net of accumulated depreciation and reducedby the outstanding balances of any bonds, mortgages, notes, or other borrow-ings that are attributable to the acquisition, construction, or improvement ofthose assets. If there are significant unspent related debt proceeds at year-end,the portion of the debt attributable to the unspent proceeds should not beincluded in the calculation of invested in capital assets, net of related debt.Rather, that portion of the debt should be included in the same net assetscomponent as the unspent proceedsfor example, restricted for capitalprojects.

23Use of a classified statement of net assets, which distinguishes between all current andlong-term assets and liabilities, is also acceptable. (Paragraphs 97 through 99 provide guidanceon presenting classified balance sheets, including reporting on restricted assets.)

15

Restricted Net Assets

34. Net assets should be reported as restricted when constraints placed on netasset use are either:24

a. Externally imposed by creditors (such as through debt covenants), grantors,contributors, or laws or regulations of other governments

b. Imposed by law through constitutional provisions or enabling legislation.

Enabling legislation,25 as the term is used in this Statement, authorizes thegovernment to assess, levy, charge, or otherwise mandate payment of re-sources (from external resource providers) and includes a legally enforceablerequirement that those resources be used only for the specific purposesstipulated in the legislation.

35. When permanent endowments or permanent fund principal amounts areincluded, restricted net assets should be displayed in two additionalcomponentsexpendable and nonexpendable. Nonexpendable net assets arethose that are required to be retained in perpetuity.

Unrestricted Net Assets

36. Unrestricted net assets consist of net assets that do not meet the definitionof restricted or invested in capital assets, net of related debt.

37. In the governmental environment, net assets often are designated to indicatethat management does not consider them to be available for general operations.In contrast to restricted net assets, these types of constraints on resources areinternal and management can remove or modify them. As described in para-graph 34, however, enabling legislation established by the reporting governmentshould not be construed as an internal constraint. Designations of net assetsshould not be reported on the face of the statement of net assets.

24Because different measurement focuses and bases of accounting are used in the statementof net assets than in governmental fund statements, and because the definition of reservedincludes more than resources that are restricted (as discussed in this paragraph), amountsreported as reserved fund balances in governmental funds will generally be different fromamounts reported as restricted net assets in the statement of net assets.25Enabling legislation also includes restrictions on asset use established by a governmentalutilitys own governing board when that utility reports based on FASB Statement 71.

16

Required Financial StatementsStatement of Activities

38. The operations of the reporting government should be presented in aformat that reports the net (expense) revenue of its individual functions. Anobjective of using the net (expense) revenue format is to report the relativefinancial burden of each of the reporting governments functions on its taxpay-ers. This format identifies the extent to which each function of the governmentdraws from the general revenues of the government or is self-financing throughfees and intergovernmental aid. As discussed in paragraph 47, this notion ofburden on the reporting governments taxpayers is important in determiningwhat is program or general revenue. General revenues, contributions to termand permanent endowments, contributions to permanent fund principal, specialand extraordinary items, and transfers should be reported separately after thetotal net expenses of the governments functions, ultimately arriving at thechange in net assets for the period. An example of a format that meets theserequirements is illustrated in paragraph 54.26

39. The statement of activities should present governmental activities at leastat the level of detail required in the governmental fund statement of revenues,expenditures, and changes in fund balancesat a minimum by function,27 asdiscussed in NCGA Statement 1, paragraphs 111 through 116. Governmentsshould present business-type activities at least by segment, as discussed inparagraph 122.

40. Governments are encouraged to provide data in the statement of activitiesat a more detailed level if the additional detail provides more useful informationwithout significantly reducing readers ability to understand the statement. Nospecific level of detail is appropriate for all governments; some have hundredsof programs and others have only a few. Therefore, reporting in greater detailthan the minimum requirements in paragraph 39 may be practical for somegovernments but not for others.

26Some governments may modify the standard format of the statement of activities or use analternative format. See paragraph 136.27The term function is used in this Statement to refer to the minimum level of detail for bothgovernmental and business-type activities required to be presented in the statement of activities.

17

Expenses

41. Governments should report all expenses by function except for those thatmeet the definitions of special or extraordinary items, discussed in paragraphs 55and 56. As a minimum, governments should report direct expenses for eachfunction. Direct expenses are those that are specifically associated with a serv-ice, program, or department and, thus, are clearly identifiable to a particularfunction.

42. Some functions, such as general government, support services, or admin-istration, include expenses that are, in essence, indirect expenses of otherfunctions. Governments are not required to allocate those indirect expenses toother functions. However, some governments may prefer to allocate someindirect expenses or use a full-cost allocation approach28 among functions. Ifindirect expenses are allocated, direct and indirect expenses should be pre-sented in separate columns to enhance comparability of direct expenses be-tween governments that allocate indirect expenses and those that do not. Acolumn totaling direct and indirect expenses may be presented but is notrequired.

43. Some governments charge funds or programs (through internal servicefunds or the general fund) for centralized expenses, which may include anadministrative overhead component. Governments are not required to identifyand eliminate these administrative overhead charges, but the summary ofsignificant accounting policies should disclose that they are included in directexpenses.

44. Depreciation expense for capital assets that can specifically be identifiedwith a function should be included in its direct expenses. Depreciation expensefor shared capital assets (for example, a facility that houses the policedepartment, the building inspection office, and the water utility office) should beratably included in the direct expenses of the appropriate functions. Deprecia-tion expense for capital assets such as a city hall or a state office building thatessentially serves all functions is not required to be included in the directexpenses of the various functions. This depreciation expense may be includedas a separate line in the statement of activities or as part of the generalgovernment (or its counterpart) function (and in either case, may be allocatedto other functions as discussed in paragraph 42). If a government uses a

28As used in this Statement, a full-cost allocation approach means allocating indirect expensesamong functions with the objective of allocating all expenses, including certain general govern-ment expenses.

18

separate line in the statement of activities to report unallocated depreciationexpense, it should clearly indicate on the face of the statement that this line itemexcludes direct depreciation expenses of the various programs. Requireddisclosures about depreciation expense are discussed in paragraph 117.

45. Depreciation expense for general infrastructure assets should not be allo-cated to the various functions. It should be reported as a direct expense of thefunction (for example, public works or transportation) that the reporting gov-ernment normally associates with capital outlays for, and maintenance of,infrastructure assets or as a separate line in the statement of activities.

46. Interest on general long-term liabilities generally should be considered anindirect expense. However, interest on long-term debt should be included in directexpenses in those limited instances when borrowing is essential to the creationor continuing existence of a program and it would be misleading to exclude theinterest from direct expenses of that program (for example, a new program thatis highly leveraged in its early stages). Excluding the cost of the borrowing whenit is necessary to establish or maintain the program would significantly understateits direct program expenses. Most interest on general long-term liabilities, how-ever, does not qualify as a direct expense and should be reported in thestatement of activities as a separate line that clearly indicates that it excludesdirect interest expenses, if any, reported in other functions. The amount excludedshould be disclosed in the notes or presented on the face of the statement.

Revenues

47. Programs are financed from essentially four sources:

a. Those who purchase, use, or directly benefit from the goods or services ofthe program (This group may extend beyond the boundaries of the reportinggovernments taxpayers or citizenry or be a subset of it.)

b. Parties outside the reporting governments citizenry (This group includesother governments and nongovernmental entities or individuals.)

c. The reporting governments taxpayers (This is all taxpayers, regardless ofwhether they benefit from a particular program.)

d. The governmental institution itself (for example, through investing).

For the purposes of the statement of activities:

Type a is always a program revenue. Type b is a program revenue, if restricted to a specific program or programs.

If unrestricted, type b is a general revenue.

19

Type c is always a general revenue, even if restricted to a specific program. Type d is usually a general revenue.

Program revenues

48. Program revenues derive directly from the program itself or from partiesoutside the reporting governments taxpayers or citizenry, as a whole; theyreduce the net cost of the function to be financed from the governments generalrevenues. The statement of activities should separately report three categories ofprogram revenues: (a) charges for services, (b) program-specific operating grantsand contributions, and (c) program-specific capital grants and contributions.

49. Charges for services include revenues based on exchange or exchange-liketransactions. These revenues arise from charges to customers or applicants whopurchase, use, or directly benefit from the goods, services, or privileges provided.Revenues in this category include fees charged for specific services, such aswater use or garbage collection; licenses and permits, such as dog licenses,liquor licenses, and building permits; operating special assessments, such as forstreet cleaning or special street lighting; and any other amounts charged toservice recipients. Payments from other governments that are exchangetransactionsfor example, when County A reimburses County B for boardingCounty As prisonersalso should be reported as charges for services.

50. Program-specific grants and contributions (operating and capital) includerevenues arising from mandatory and voluntary nonexchange transactions withother governments, organizations, or individuals that are restricted29 for use ina particular program. Some grants and contributions consist of capital assets orresources that are restricted for capital purposesto purchase, construct, orrenovate capital assets associated with a specific program. These should bereported separately from grants and contributions that may be used either foroperating expenses or for capital expenditures of the program at the discretionof the reporting government. These categories of program revenue are specifi-cally attributable to a program and reduce the net expense of that program tothe reporting government. For example, a state may provide an operating grantto a county sheriffs department for a drug-awareness-and-enforcement pro-gram or a capital grant to finance construction of a new jail. Multipurpose grants(those that provide financing for more than one program) should be reported asprogram revenue if the amounts restricted to each program are specifically

29Paragraph 34 discusses the meaning of the term restricted.

20

identified in either the grant award or the grant application.30 Multipurposegrants that do not provide for specific identification of the programs andamounts should be reported as general revenues.

51. Earnings on endowments or permanent fund investments should be re-ported as program revenues if restricted to a program or programs specificallyidentified in the endowment or permanent fund agreement or contract. Earningsfrom endowments or permanent funds that finance general fund programs orgeneral operating expenses, for example, should not be reported as programrevenue. Similarly, earnings on investments not held by permanent funds alsomay be legally restricted to specific functions or programs. For example, interestearnings on state grants may be required to be used to support a specificprogram. When earnings on the invested accumulated resources of a programare legally restricted to be used for that program, the net cost to be financed bythe governments general revenues is reduced, and those investment earningsshould be reported as program revenues.

General revenues

52. All revenues are general revenues unless they are required to be reportedas program revenues, as discussed in paragraphs 48 through 51. All taxes,even those that are levied for a specific purpose, are general revenues andshould be reported by type of taxfor example, sales tax, property tax,franchise tax, income tax. All other nontax revenues (including interest, grants,and contributions) that do not meet the criteria to be reported as programrevenues should also be reported as general revenues. General revenuesshould be reported after total net expense of the governments functions.

Reporting contributions to term and permanent endowments, contributions topermanent fund principal, special and extraordinary items, and transfers

53. Contributions to term and permanent endowments, contributions to per-manent fund principal, special and extraordinary items (defined in para-graphs 55 and 56), and transfers (defined in paragraph 112) between govern-mental and business-type activities should each be reported separately from,but in the same manner as, general revenues. That is, these sources offinancing the net cost of the governments programs should be reported at thebottom of the statement of activities to arrive at the all-inclusive change in netassets for the period.

30The grant application should be used for this purpose only if the grant award was based onthat application.

21

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peac

tiviti

esX

XX

XX

XX

XX

X

X

XX

XX

XX

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lprim

ary

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rnm

ent

XX

XX

XX

XX

XX

XX

XX

XX

(XX

X)

XX

XX

X

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mp

on

ent

un

itsC

U#1

XX

XX

XX

XX

XX

XX

X

X

Gen

eral

reve

nues

de

taile

dX

XX

XX

XX

XX

Con

trib

utio

nsto

perm

anen

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nds

XX

X

X

Spe

cial

item

sX

X

Tr

ansf

ers

XX

(XX

)

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ener

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venu

es,

cont

ribut

ions

,sp

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ms,

and

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sX

XX

XX

XX

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nge

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tas

sets

XX

XX

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etas

sets

be

ginn

ing

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

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Net

asse

ts

endi

ngX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

31S

eepa

ragr

aph

136.

22

Special and Extraordinary Items

55. Extraordinary items are transactions or other events that are both unusualin nature and infrequent in occurrence. APB Opinion No. 30, Reporting theResults of OperationsReporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions, as amended and interpreted, defines the terms unusual in natureand infrequency of occurrence. As discussed in paragraph 53, extraordinaryitems should be reported separately at the bottom of the statement of activities.

56. Significant transactions or other events within the control of managementthat are either unusual in nature or infrequent in occurrence are special items.Special items should also be reported separately in the statement of activities,before extraordinary items, if any. In addition, governments should disclose inthe notes to financial statements any significant transactions or other eventsthat are either unusual or infrequent but not within the control of management.

Eliminations and Reclassifications

57. In the process of aggregating data for the statement of net assets and thestatement of activities, some amounts reported as interfund activity and bal-ances in the funds should be eliminated or reclassified.

Internal balancesstatement of net assets

58. Eliminations should be made in the statement of net assets to minimize thegrossing-up effect on assets and liabilities within the governmental andbusiness-type activities columns of the primary government. As a result,amounts reported in the funds as interfund receivables and payables should beeliminated in the governmental and business-type activities columns of thestatement of net assets, except for the net residual amounts due betweengovernmental and business-type activities, which should be presented asinternal balances. Amounts reported in the funds as receivable from or payableto fiduciary funds should be included in the statement of net assets as receiv-able from and payable to external parties (consistent with the nature of fiduciaryfunds), rather than as internal balances. All internal balances should be elimi-nated in the total primary government column.

23

Internal activitiesstatement of activities

59. Eliminations should be made in the statement of activities to remove thedoubling-up effect of internal service fund activity. The effect of similar internalevents (such as allocations of accounting staff salaries) that are, in effect,allocations of overhead expenses from one function to another or within thesame function also should be eliminated, so that the allocated expenses arereported only by the function to which they were allocated.

60. The effect of interfund services provided and used (see paragraph 112)between functionsfor example, the sale of water or electricity from a utility tothe general governmentshould not be eliminated in the statement of activi-ties. To do so would misstate both the expenses of the purchasing function andthe program revenues of the selling function.

Intra-entity activity

61. Resource flows between the primary government and blended componentunits should be reclassified in accordance with the provisions of paragraph 112as internal activity in the financial statements of the reporting entity. Resourceflows (except those that affect the balance sheet only, such as loans andrepayments) between a primary government and its discretely presented com-ponent units should be reported as if they were external transactionsthat is,as revenues and expenses. However, amounts payable and receivable be-tween the primary government and its discretely presented component units orbetween those components should be reported on a separate line.

Reporting Internal Service Fund Balances

62. Internal service fund asset and liability balances that are not eliminated inthe statement of net assets should normally be reported in the governmentalactivities column. Although internal service funds are reported as proprietaryfunds, the activities accounted for in them (the financing of goods and servicesfor other funds of the government) are usually more governmental thanbusiness-type in nature. If enterprise funds are the predominant or only partici-pants in an internal service fund, however, the government should report thatinternal service funds residual assets and liabilities within the business-typeactivities column in the statement of net assets.

24

Fund Financial Statements

FundsOverview and Definitions

63. Fund financial statements should be used to report additional and detailedinformation about the primary government. Governments should report gov-ernmental, proprietary, and fiduciary funds to the extent that they have activitiesthat meet the criteria for using those funds. (See paragraphs 6473.)

a. Governmental funds (emphasizing major funds)(1) The general fund(2) Special revenue funds(3) Capital projects funds(4) Debt service funds(5) Permanent funds

b. Proprietary funds(6) Enterprise funds (emphasizing major funds)(7) Internal service funds

c. Fiduciary funds and similar component units(8) Pension (and other employee benefit) trust funds(9) Investment trust funds

(10) Private-purpose trust funds(11) Agency funds.

Governmental Funds

64. Governmental fund reporting focuses primarily on the sources, uses, andbalances of current financial resources and often has a budgetary orientation.The governmental fund category includes the general fund, special revenuefunds, capital projects funds, debt service funds, and permanent funds. With theexception of permanent funds, those governmental funds are defined in NCGAStatement 1, as amended.

65. Permanent funds should be used to report resources that are legally restrictedto the extent that only earnings, and not principal, may be used for purposes thatsupport the reporting governments programsthat is, for the benefit of thegovernment or its citizenry.32 (Permanent funds