The Comprehensive Annual Financial Report, or CAFR, is one of the most important financial documents prepared annually by governments. This voluminous report goes beyond the budget to provide a detailed breakdown of actual government revenues, expenditures, assets and liabilities in a given year.
Given the depth of detail and amount of financial information required as well as the ongoing focus on public sector transparency and accountability, it is critical that governments prepare CAFRs as accurately as possible.
In RKL’s decades of experience helping governments manage compliance and reporting obligations, our advisors recognize certain areas of the CAFR that may trip up public officials. Here are some of the prime CAFR pitfalls and suggestions to avoid them in future reports.
CAFR pitfall: Lack of explanation for significant fund balance changes in management’s discussion and analysis
GASB 34, Paragraph 11d requires an analysis of the balances and transactions of individual funds, including reasons for any changes. Make sure significant changes that impact fund balances or net financial position are addressed in this section of the CAFR, not just the dollar amount of the change. It is important to note whether the availability of any funds will be affected by any restrictions, limitations or commitments.
CAFR pitfall: Incomplete comparison of proposed and final spending amounts in management’s discussion and analysis
GASB 34, Paragraph 11e requires a comparison between the original budget proposal and final budget amounts, as well as variances between budgeted and actual results. Governments should include in this section the reasons behind any variations and assess what if any impact they will have on future liquidity or funding needs.
CAFR pitfall: Combined deferred inflows and resources with current assets and liabilities
In GASB 63, Paragraph 7, government officials are often flagged for combining deferred outflows and inflows of resources with current assets and liabilities. Instead, the amount of any deferred inflows of resources should be reported in the section after liabilities on the statement of financial position, and deferred outflows should be reported in the section after assets.
CAFR pitfall: Incorrect calculation of net investment in capital assets
On the statement of net position (GASB 34, Paragraph 33), governments must report a component of net position that consists of capital assets, net of accumulated depreciation and reduced by outstanding balances of bonds, mortgages, notes or other borrowings. When calculating these amounts, governments should be sure to incorporate deferred amounts from refundings, all capital assets like land property or construction currently in progress and retainage payable. Keep in mind, however, that debt with unspent proceeds should not factor into this calculation. Instead, this portion of debt should be included in the same net assets component of the unspent proceeds.
CAFR pitfall: Lack of budgetary comparisons for governmental funds
Governments must provide a budgetary comparison for each major special revenue fund that has a legally adopted budget as required by GASB 34, Paragraph 130. Budgetary comparisons for nonmajor special revenue funds, debt service funds and capital projects funds must be provided as other supplementary information.
When these schedules are required to be reported as required supplementary information, they must be accompanied by notes to describe the basis of budgeting and any related excess expenditures over appropriations not evident on the schedule.
CAFR pitfall: Incomplete or unspecific disclosures
Officials are required by GASB 61, Paragraph 11a to disclose all component units and their relationships to the government entity. Specific criteria for this disclosure is often overlooked, including an explanation of the rationale for including each component unit or categorization of the units as discretely presented, blended, or included in the fiduciary fund financial statements. Another disclosure required but often overlooked is the purpose of inter-fund balances and transfers – be sure to make these disclosures specific to the government, instead of a generic description.
RKL’s Government Industry Group has a team of experienced financial and business advisors focused on helping public sector clients comply with reporting requirements. For more information on CAFR preparation or assistance with other financial or organization challenges, contact Mark S. Zettlemoyer, CPA, CFE, Partner and Government Industry Group Leader.