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GASB Statements 34 and 41
By Randy Kinnersley and Terry Patton
MARCH 2005 - Budgetary comparison statements have always been an important part of external government financial reporting in the United States. With the issuance of GASB Statement 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, GASB reaffirmed the importance of presenting budgetary information. Statement 34 continues to require budgetary comparisons for certain funds, but has been amended by Statement 41, Budgetary Comparison Schedules—Perspective Differences, which explains how these requirements may affect some of a government’s reporting and disclosure of budgetary information. Statement 41 is effective for government units with total annual revues of $10 million or greater for fiscal years beginning after June 15, 2002. For smaller government units, the effective date is for fiscal years beginning after June 15, 2003.
Statement 34 paragraphs 130 (as amended by Statement 41) and 131 explain the requirements for budgetary comparison reporting. Paragraph 130 states that “budgetary comparisons should be presented for the general fund and for each major special revenue fund that has a legally adopted annual budget.”
GASB’s “Guide to Implementation of GASB Statement 34 on Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments” specifies that governments with biennial budgets should also present annual budgetary comparison schedules for their general fund and major special revenue funds (question 250). GASB does not, however, provide specific guidance to governments that budget on a biennial basis. In practice, governments with biennial budgets take different approaches to presenting budgetary comparisons, depending upon how their biennial budget is passed.
If a government passes a biennial budget that contains two legally enforceable annual budgets, the government would report the first year’s annual budget in the budgetary comparison schedule for the first year of the biennium. Similarly, the government would report the second year’s annual budget in the second year of the biennium. If unused appropriations from the first year of the biennium budget are legally authorized to be spent in the second year, the government would increase its second-year budget for these “carryover” amounts.
If a government passes a biennial budget that does not separate budgeted amounts into two annual periods, the government may report the entire amount of the biennial budget in the first year of the biennium, and the unexpended amounts from the first year as the beginning budget for the second year.
Regardless of presentation, a reader of the budgetary comparisons should be able to identify any instances of spending in excess of the legally adopted budget.
General Fund and Major Special Revenue Funds
Statement 34 requires budgetary comparison schedules or statements only for the general fund and for each major special revenue fund that has a legally adopted budget. The answer to the Guide’s question 245 clarifies that a budgetary comparison presentation is required for any legally budgeted special revenue fund reported as major, even if the fund is voluntarily reported as major, based on Statement 34, paragraph 76. Governments cannot include budgetary comparisons in the basic financial statements or required supplementary information (RSI) for any other fund, including debt service funds and capital project funds. Governments may, however, report budgetary comparison schedules for other funds as supplementary information in the comprehensive annual financial report (CAFR).
Placement of Budgetary Comparisons
GASB encourages governments to present budgetary comparison information for the general fund and major special revenue funds in schedules as a part of RSI immediately after the notes to the basic financial statements. Governments have the option of reporting budgetary comparison information for these funds in statements as a part of the basic financial statements. Question 248 of the Guide stipulates that if this information is presented as part of the basic financial statements, it should be presented immediately after the governmental fund financial statements—that is, after the statement of revenues, expenditures, and changes in fund balances.
Governments do not have the option to present some budgetary information as RSI and other budgetary information in the basic financial statements. As provided for by question 247 of the Guide, budgetary comparison information for both the general fund and the major special revenue funds should be presented together, either as part of RSI or in the basic financial statements.
The budgetary comparison information is titled a “schedule” if reported as part of RSI, but a “statement” if reported as part of the basic financial statements. Regardless of where it is presented, the content of the schedule or statement remains the same; only the title differs.
The basis for conclusions in Statement 41, paragraph 13, provides two reasons why GASB encourages the presentation of budgetary information as a part of RSI rather than as part of the basic financial statements. First, GASB concluded that, although budgetary comparison information is important to show whether resources are obtained and used in accordance with a legally adopted budget, budgetary reporting is not essential for understanding the financial position and results of operations for a government. Second, RSI is the more appropriate location because, unlike information presented in the basic financial statements, GASB does not set standards for budgetary measures.
Another factor to consider when deciding how to present budgetary comparison information—schedules in RSI or statements in the basic financial statements—is the auditor’s responsibility for the information. Unless otherwise engaged, auditors generally will not express an opinion on budgetary comparison schedules presented as RSI. Instead, the auditor will perform limited procedures on the information in the schedules, as described in SAS 52, Omnibus Statement on Auditing Standards (AU section 558, “Required Supplementary Information”). If the information is presented with the basic financial statements, auditors must perform additional procedures; these additional procedures should provide greater assurance, but may also result in additional audit costs.
Statement 34, paragraph 131, allows governments to present budgetary comparison schedules or statements “using the same format, terminology, and classifications as the budget document, or using the format, terminology, and classifications in a statement of revenues, expenditures, and changes in fund balances.” Exhibit 1 illustrates the statement of revenues, expenditures, and changes in fund balance presentation format. GASB also permits a budget document format, which may be more meaningful to elected officials, who are often more familiar with budget documents than with GAAP financial statements. Statement 34, paragraph 452, clarifies that GASB does not prefer one presentation format over the other.
Columns in Budgetary Comparisons
Before Statement 34, governments were required to present only two columns of data in their budgetary comparison statements: the final budget, after legally approved transfers and adjustments during the year, and the actual results on a budgetary basis (often different from GAAP). Most governments voluntarily included a third column to report the variance between the two. Statement 34 requires a similar format, plus an additional column for the original budget. This makes three required columns: original budget, final budget, and actual amounts on a budgetary basis. Exhibit 1 illustrates this format.
The original budget column must include only the first complete appropriated budget. Interim budgets that cover a short period (e.g., three months) and serve as temporary spending authority should not be presented in the budgetary comparison schedule as the original budget (question 251 of the Guide). Statement 34, paragraph 130, further explains that the original budget—
may be adjusted by reserves, transfers, allocations, supplemental appropriations, and other legally authorized legislative and executive changes before the beginning of the fiscal year. The original budget should also include actual appropriation amounts automatically carried over from prior years by law. For example, a legal provision may require the automatic rolling forward of appropriations to cover prior-year encumbrances.
The final budget column presents the final budget, which is the original budget adjusted for all reserves, transfers, allocations, supplemental appropriations, and other legally authorized legislative and executive changes applicable to the fiscal year. This includes legally authorized changes or amendments even if they occur after the end of the fiscal year (Guide, question 253). All columns in the budgetary comparison schedule or statement must be presented on a budgetary basis, which may differ from the modified accrual basis used for GAAP reporting in the governmental fund financial statements.
Governments are encouraged, but not required, to report the variance between the final budget and the actual results. This is the most common presentation used by early implementers of Statement 34. A government may also choose to report the variance between the original budget and the final budget amounts, although few early implementers have chosen to present such a variance.
Statement 34 did not formally change the required note disclosures related to budgetary comparisons. Certain changes may be necessary, nonetheless, because budgetary comparisons are required only for the general fund and major special revenue funds, instead of for all budgeted governmental fund types, as required before Statement 34. Governments must continue to disclose their budgetary basis of accounting and any expenditures in excess of appropriations, but only for funds they are required to present in budgetary comparison statements or schedules.
The placement of these budgetary comparison disclosures within a government’s financial report may change. Basic financial statements and RSI require separate sets of note disclosures. If a government presents budgetary comparisons as a part of RSI, notes to the budgetary comparison schedules should also be presented as part of RSI. The disclosure should be included in the notes to the basic financial statements if the budget comparisons are presented there. Finally, disclosure of material violations of the annual appropriated budget for any governmental fund, including debt service and capital projects funds, must be presented in the notes to the basic financial statements, regardless of where budgetary comparisons are presented.
Governments that budget on a GAAP basis do not need to prepare a reconciliation from budget to GAAP. For governments that budget on a basis other than GAAP, paragraph 131 of Statement 34 requires a reconciliation of budgetary-basis actual amounts to GAAP-basis actual amounts. This is required only for the general fund and major special revenue funds. Exhibit 2 illustrates a reconciliation for a government’s general fund. The reconciliation may be presented as a schedule on the same page or on a page immediately after the budgetary comparison statement or schedule. Alternatively, the reconciliation may be disclosed in the notes to RSI or the notes to the basic financial statements, depending upon the location of the budgetary comparison schedule or statement.
Neither Statement 34 nor the previous authoritative guidance, National Council on Governmental Accounting Interpretation 10, prescribes the budgetary elements that should be reconciled. Some governments prepare the reconciliation based on the different elements within the operating statements (e.g., revenues and expenditures, as illustrated in Exhibit 2), whereas others reconcile only the excess (deficiency) of revenues over (under) expenditures and other sources (uses) of financial resources. Other governments reconcile fund balances as reported on a budgetary basis and as reported on a GAAP basis.
Section 2400.110–.119, of the June 30, 2004, Codification of Governmental Accounting and Financial Reporting Standards identifies four types of differences between budget basis and GAAP basis that may need to be presented in the reconciliation:
- Basis differences occur when the budgetary basis differs from the modified accrual basis used for governmental funds.
- Timing differences occur when the budget accounting period differs from the period used for GAAP reporting. Examples may include continuing appropriations and biennial budgeting.
- Entity differences occur, for example, when the budget omits programs that are part of the fund being reported.
- Perspective differences are specifically addressed in Statement 41, and discussed below.
Management’s Discussion and Analysis (MD&A)
Statement 34 requires an analysis in MD&A of significant variations for the general fund (or its equivalent) between the original and final budget amounts, as well as between the final and actual budget amounts. This analysis should include any currently known reasons for significant variations that the government expects to affect its liquidity or ability to provide future services.
Supplementary Information in the CAFR
Statement 34 only slightly and indirectly modifies the requirements for presenting budgetary comparisons in the supplementary information (SI) when a CAFR is prepared. Statement 34 establishes standards only for basic financial statements, MD&A, and certain other RSI; it does not establish general standards for SI. Governments that present additional budgetary comparison schedules in SI are not required to follow the provisions of Statement 34, as amended by Statement 41. For example, SI budgetary schedules could omit the original budget column required by Statement 34. For the sake of consistency, however, it is prudent for governments to use the same format and include the same content regardless of the budgetary comparison schedule location. Thus, budgetary comparison information would be the same whether it is presented as a statement in the basic financial statements, a schedule in RSI, or a schedule in SI.
Statement 41 clarified the presentation requirements for budgetary comparisons by replacing the first sentence of paragraph 130 and footnote 53 of Statement 34 to guide governments with significant perspective differences that result in their not being able to present budgetary comparisons for their general fund or major special revenue funds.
Perspective differences exist when the structure of financial information for budgetary purposes differs from the GAAP fund structure required by Statement 34. Governments with minor perspective differences can probably explain these differences in their budget-to-GAAP reconciliation. Governments may not be able to present budgetary comparisons for their general and major special revenue funds, however, if they have budgetary fund structures that prevent them from associating estimated revenues and appropriations from their legally adopted budgets to the major revenue sources and functional expenditures reported in these funds. In such cases, Statement 41 requires governments to present budgetary comparison schedules based on the budget structure used for their legally adopted budget. Statement 41 also requires these governments to present the budgetary comparison information as a schedule in RSI.
Governments may have several budgetary funds that do not use a GAAP fund structure. Statement 41 requires budgetary comparisons only for budgetary funds used to budget activities accounted for in the general fund and major special revenue funds.
An example adapted from Appendix C of Statement 41 illustrates the presentation requirements. Assume a city has six budgets: a general operating budget, a HUD programs budget, and four other budgets. Six budgetary funds are created to control the fiscal activities of the government. The city budgets the HUD programs using a GAAP fund structure and must present a budgetary comparison schedule if the HUD programs are reported as a major special revenue fund. The remainder of the budgetary funds do not use a GAAP fund structure. For these funds, the appropriations from the city’s legally adopted budget do not correspond to the functional expenditures reported in the GAAP funds.
The general operating budget is used to manage activities accounted for in the general fund and the nonmajor special revenue funds. Because the city’s budget for general operations does not use a GAAP fund structure, presenting a budgetary comparison schedule for the GAAP general fund is not possible. The city must present a budgetary comparison schedule for the entire general operations budget, because that is the budget used to control activities reported in the general fund.
Budgetary comparison schedules are not presented in RSI for the remaining four budgetary funds if their budgets do not relate to activities reported in the general fund or the major special revenue funds. Budgetary comparison schedules may be voluntarily presented for these budgetary funds as part of SI.
Randy Kinnersley, PhD, CPA, CGFM, is an assistant professor of accounting at Western Kentucky University, Bowling Green, Ky. Terry Patton, PhD, CPA, CGFM, is the research manager at the Governmental Accounting Standards Board (GASB), Norwalk, Conn. Previously he was an assistant professor of accounting at the University of Wisconsin–Oshkosh and a supervisor at a Texas CPA firm, where he conducted audits of local governments.
Note: The views expressed in this article are those of the authors. Official positions of GASB are determined only after extensive due process and deliberation.