Chapter 09 – Financial Reporting of State and Local Governments
CHAPTER 9: FINANCIAL REPORTING OF STATE AND LOCAL
GOVERNMENTS
OUTLINE
Number
Topic
Type/Task
Status
(re: 18/e)
Questions:
9-1
Primary governments
Identify
Same
9-2
Financial accountability
Explain
New
9-3
Financial reporting entity
Define
Same
9-4
Component units
Define
Same
9-5
Types of component units
Explain
Same
9-6
CAFR
Identify
New
9-7
Required financial statements
List
Same
9-8
Reconciliations
Explain
Same
9-9
Major component units
Compare
New
9-10
IPSASB
Explain
New
9-11
XBRL
Explain
New
Cases:
9-12
Identification of component units
Analyze
Same
9-13
MD&A and statistical tables
Analyze
Revised
9-14
Analyzing reconciliation of financial reports
Analyze
Same
9-15
XBRL
Understand
New
Exercises/Problems:
9-16
Examine the CAFR
Evaluate
Revised
9-17
Various
Multiple Choice
Revised 1, 7,
10, 12, 14, 18
new 13, 15
9-18
Primary governments
Matching
Same
9-19
Financial reporting
Matching
Revised
9-20
Comprehensive set of transactions
Journal entries
Same
9-21
Reconciliation of financial statements
Report
preparation
Same
9-22
Operating statement reconciliation
Report
preparation
Revised
9-23
Adjusting net position balances
Matching
Revised
9-24
Change in net position
Calculation
Revised
9-25
Governmental fund financial statements
Error
identification
Revised
9-27
Modified accrual to accrual accounting
Adjustments, JEs
Same
Chapter 09 – Financial Reporting of State and Local Governments
9-2
CHAPTER 9: FINANCIAL REPORTING OF STATE AND LOCAL
GOVERNMENTAL UNITS
Answers to Questions
9-1. A special purpose government can be considered a primary government if it has a
separately elected governing body, is legally separate from other entities, and is fiscally
independent of other state and local governments. To be legally separate, the special
purpose government must be organized under its own identity and operate as an
“artificial person” separate and apart from its creator and all others. A special purpose
government is fiscally independent if it can determine its own budget, set its own rates or
charges, levy its own taxes, and issue bonded debt without approval of another
government.
9-2. A primary government will know if it is financially accountable for another entity if the
following criteria are met:
1. The primary government appoints a majority of the entity’s governing board, and
2. Either of the following is present:
a. The primary government is able to impose its will on the organization,
General Problem Information: Financial accountability
Learning Objective: 9-1
Topic: The Government Reporting Entity
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry
Level of Difficulty: Easy
9-3. According to the GASB, a financial reporting entity is a primary government,
organizations for which the primary government is financially accountable, and other
organizations for which the nature of their relationships with the primary government are
Chapter 09 – Financial Reporting of State and Local Governments
9-3
Ch. 9, Answers, Question 9-3 (Cont’d)
for which the primary government is financially accountable.
General Problem Information: Financial reporting entity
Learning Objective: 9-1
9-4. A component unit is recognized within the reporting entity’s financial statements. By
definition a component unit is a legally separate organization for which the elected
officials of the primary government are financially accountable. Additionally, a primary
government’s financial statements should include as a component unit any organization
that by the nature and significance of its relationship with the government would be
misleading to exclude, and any legally separate tax-exempt organization that meets
certain criteria identified by the GASB. The three criteria that must be met are: (1) The
General Problem Information: Component units
Learning Objective: 9-2
Topic: The Government Reporting Entity
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry
Level of Difficulty: Easy
9-5. Component units for which the primary government is financially accountable are
reported in one of two ways—through blended or discrete presentation. A blended
component unit is one that is an integral part of the primary government, which can be
demonstrated through factors such as common governing boards, financial benefit/burden
Ch. 9, Answers, Question 9-5 (Cont’d)
Chapter 09 – Financial Reporting of State and Local Governments
9-4
A discretely presented component unit is not as closely aligned with the primary
government as a blended component unit. It is more independent in one or more of the
areas that were identified when considering whether a component unit should be blended.
1. The assets received or held by the component unit are entirely or almost entirely
for the direct benefit of the primary government, its component units, or its
constituents.
3. The assets received or held by an individual organization that the specific primary
government, or its component units, is entitled to or has the ability to otherwise –
access are significant to the primary government.
General Problem Information: Types of component units
Learning Objective: 9-2
Topic: The Government Reporting Entity
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry
Level of Difficulty: Medium
9-6. Included as components of a CAFR are an introductory section (including a table of
contents and a letter of transmittal), an auditor’s report (as appropriate), the basic
financial statements and their accompanying notes, required supplementary material
(including the MD&A), combining and individual fund statements and schedules, and a
statistical section.
General Problem Information: CAFR
Learning Objective: 9-3
Level of Difficulty: Easy
9-7. The nine required statements are:
• The two government-wide financial statements—statement of net position and
statement of activities.
Chapter 09 – Financial Reporting of State and Local Governments
9-5
Ch. 9, Answers, Question 9-7 (Cont’d)
• The two governmental fund financial statements—balance sheet and statement of
revenues, expenditures, and changes in fund balances.
Recall that GASB standards allow the budgetary comparison information to be presented
as a statement or a schedule (required supplementary information). As a result, students
may list ten statements under the assumption that the budgetary comparison is required
when it is optional under the GASB standards.
General Problem Information: Required financial statements
Learning Objective: 9-3
9-8. The GASB requires two financial statement reconciliations: (1) a reconciliation of the
total governmental fund balances on the governmental funds balance sheet to the total
governmental activities net position on the government-wide statement of net position
and (2) a reconciliation of the net change in governmental fund balances on the statement
of revenues, expenditures, and changes in fund balances to the change in governmental
activities net position on the government-wide statement of activities. Reconciliations are
required since the governmental funds statements and the government-wide statements
report on two different bases of accounting. For this reason, the amounts reported on the
statements vary and reconciling the differences assists the reader in understanding why
the amounts on the statements vary.
General Problem Information: Reconciliations
Learning Objective: 9-4
Level of Difficulty: Easy
9-9. No. Recall from Chapter 2 that major funds are determined based on the size of the fund.
Therefore, quantitative criteria are applied in determining major funds. Those funds with
a financial statement element (such as revenues) that is a least 10 percent of the
corresponding element total for all funds of that category or type (such as total
Chapter 09 – Financial Reporting of State and Local Governments
9-6
Ch. 9, Answers, Question 9-9 (Cont’d)
selection is qualitative in nature. A component unit is considered major based on the
significance of its relationship with the primary government. This would include
considering the significance of any financial benefit or burden, or the significance of the
services provided to the primary government’s citizens.
General Problem Information: Major component units
9-10. IPSASB stands for International Public Sector Accounting Standards Board. It is an
international standards setting board for the public sector, much like the IASB
General Problem Information: IPSASB
Learning Objective: 9-5
Topic: Other Financial Reporting Issues and Topics
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Easy
9-11. XBRL stands for eXtensible Business Reporting Language. It allows financial statement
information to be presented in a machine-readable format. Currently, there is no
requirement that state and local governments provide financial information in a machine-
readable format. However, there is increasing interest in such reporting given that XBRL
General Problem Information: XBRLLearning Objective: 9-5
Topic: Other Financial Reporting Issues and Topics
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
Chapter 09 – Financial Reporting of State and Local Governments
9-7
Solutions to Cases
9-12. a. Tesser Municipal Hospital is a component unit of the City of Tesser. Tesser is
financially accountable for the hospital since the mayor appoints the governing
board and the city is able to impose its will on the hospital through final approval
of the budget.
c. The Sports Authority is not a component unit of Dawson County. As indicated,
the Sports Authority is a legally separate entity with its own board; therefore, the
only question is if there is fiscal dependency on the county. Since the actions of
the Sports Authority are voluntary and the recommendations of the county need
not be incorporated, no fiscal dependency is created.
e. Help for Kids is not a component unit of Alice County. Through its request the
county is performing what is referred to as a “ministerial” or compliance function
(GASB, Codification, Sec. 2100.116). A compliance function is not considered to
result in fiscal dependence.
General Problem Information: Identification of component units
Learning Objective: 9-3
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry
Level of Difficulty: Hard
9-13. a. The three largest revenue sources for the City and County of Denver are sales
taxes (36.05% of the 2019 total revenues), property taxes (19.26% of the 2019
total revenues), and charges for services (12.58% of the 2019 total revenues).
Chapter 09 – Financial Reporting of State and Local Governments
9-8
Ch. 9, Solutions, Case 9-13b. (Cont’d)
b. Sales tax revenues have increased every year. (It should be noted that although it
appears sales taxes declined steeply in 2017, a review of the sales taxes by
category will reveal that there is an error in the first table, and in fact, sales tax
revenues in 2017 were $721,512.) Relative to 2018, sales tax revenues have
Based on trend information alone, the strong sales tax trends would seem to
indicate that sales tax revenues will continue to grow over the next two to three
years. One sector that does not appear as strong is information producers and
distributors. This source has up and down periods, indicating it is not as stable as
some other sectors. While the trend is favorable, Denver can anticipate that from
2020, and over an unknown period, sales taxes will be down due to COVID-19
and the contraction of the economy.
c. Over the 10-year period provided on the table, revenues have grown 73.10%
while expenditures have grown 63.43%. However, this is somewhat misleading in
that for the last three years Denver’s total expenditures have exceeded its
revenues. In fact, for the 10 years shown, expenditures have been greater than
revenues six out of 10 years.
It is difficult to predict the next two to three years, other than to say it can be
expected that expenditures will exceed revenues. History seems to show that
Denver has difficulty achieving a positive revenue over expenditures number and
Chapter 09 – Financial Reporting of State and Local Governments
9-9
Ch. 9, Solutions, Case 9-13 (Cont’d)
General Problem Information: MD&A and statistical tables
Learning Objective: 9-4
Topic: Government Financial Reports
9-14. a. The list provided by each student should vary somewhat based on the CAFR
report used. However, some items that could be listed as leading to differences
between the net change in fund balances and net change in governmental
activities net position include:
• Capital outlays reported as expenditures on the statement of revenues,
expenditures, and changes in fund balances are not reported on the
statement of activities.
• Some accrued expenses not reported on the statement of revenues,
expenditures, and changes in fund balances are reported on the statement
of activities.
• Some revenues that are not available are not reported on the statement of
revenues, expenditures, and changes in fund balances, but are reported on
b. The list provided by each student should vary somewhat based on the CAFR
report used. However, some items that could be listed as leading to differences
between the fund balances on the balance sheet and the governmental activities
net position on the statement of net position include:
• Capital outlays are reported as assets on the statement of net position and
Chapter 09 – Financial Reporting of State and Local Governments
9-10
Ch. 9, Solutions, Case 9-14 b. (Cont’d)
• Some accrued liabilities reported on the statement of net position are not
reported on the balance sheet.
• Some revenues recognized as deferred inflows of resources on the balance
sheet are not recognized on the statement of net position.
c. Each report will vary, but it is important that the student point out that the reason
for the difference is due to different methods used in capturing and reporting the
transactions (modified accrual versus accrual basis of accounting). The student
will also want to point out that the reason for the difference is that the reports
serve different purposes: a short-term focus (governmental funds) that provides
information related to fiscal accountability and a long-term focus (governmental
activities) that provides information related to operational accountability.
General Problem Information: Analyzing reconciliation of financial reports
Learning Objective: 9-4
Topic: Preparation of Basic Financial Statements
9-15.
a. The work group is trying to address the lack of standard reporting in state and
local government financial reporting, which prevents the ability to aggregate data
and compare financial performance over time and across governments. To help
address this problem, the workgroup is designing schemas and an XBRL
implementation for open data reporting of financial results.
c. No, the format using XBRL is the same as what is shown in the textbook. As a
note, Will County is using the Inline version of XBRL.
d. Will County is reporting both the financial statement and some notes to the
financial statements as tagged sections. In the 2018 financial statements (the most
Chapter 09 – Financial Reporting of State and Local Governments
9-11
Ch. 9, Solutions, Case 9-15 d. (Cont’d)
funds, statement of revenues, expenditures, and changes in fund balance. The
notes information includes schedules for indebtedness and Pension and OPEB
schedule information.
f. In 2018, Will County did not use any custom tags.
g. The schedules are indebtedness and Pension and OPEB.
General Problem Information: XBRL
Learning Objective: 9-5
Topic: Other Financial Reporting Issues and Topics
Solutions to Exercises and Problems
9-16. Since each of the students will have a different annual report, the solutions to 9-16 should
differ from student to student. Note that not all reports that say “CAFR” on the cover
have three sections. Some reports may only contain the middle or financial section.
General Problem Information: Examine the CAFR
Learning Objective: 9-3
Topic: Government Financial Reports
2. d. 7. a. 12. c.
4. c. 9. b. 14. a.
5. c. 10. d. 15. c.
General Problem Information: Various
Learning Objective: 9-5
Topic: Various Chapter Topics
Bloom’s Taxonomy: Understand
Chapter 09 – Financial Reporting of State and Local Governments
Ch. 9, Solutions, Exercise 9- 17 (Cont’d)
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB Critical
Thinking
Level of Difficulty: Medium
9-18. 1. Y Waseca County is a general-purpose government and, by
definition, is therefore a primary government.
3. Y Tri-County School District is a special purpose government that
meets the criteria for being considered a primary
government in that it has a separately elected board, is
5. N Greenfield Sports Authority is a joint venture and does not meet
the definition of a primary government since it is owned and
operated by two groups, one of which is not a government. There
is no indication that the joint venture has a separately elected
governing body or that it is fiscally independent.
General Problem Information: Primary government
Learning Objective: 9-3
Topic: The Government Reporting Entity
2. I 7. MDA 12. F
4. MDA 9. S 14. MDA
5. S 10. F 15. S
General Problem Information: Financial reporting
Learning Objective: 9-3
Topic: Preparation of Basic Financial Statements
Bloom’s Taxonomy: Remember
9-13
9-20. CITY OF LYNNWOOD
TRANS. FUND AMOUNTS
NO. OR ACTIVITY ACCOUNT TITLE Debits Credits
1. GF ESTIMATED REVENUES 2,000,000
2. GF TAXES RECEIVABLE—CURRENT 1,940,000
ALLOWANCE FOR UNCOLLECTIBLE
CURRENT TAXES 9,000
REVENUES 1,931,000
3. GF OFU—INTERFUND TRANSFERS OUT 25,000
CASH 25,000
ISF CASH 25,000
EQUIPMENT 300,000
ACCUMULATED DEPRECIATION 65,000
OFS—INTERFUND TRANSFERS IN 260,000