A STREAMLINED FINANCIAL REPORTING MODEL FOR GOVERNMENTAL ENTITIES

By DARRELL BURKS

In an era of strained budgets and escalating costs, the financial statements and financial reporting packages of governmental entities are being examined more closely than ever. Many individuals that do not work directly for a state or local government have an interest in these financial statements. They include citizens, representatives of bond rating agencies, investors, creditors, regulators and representatives of higher units of government.

Presently, these individuals often find it difficult to quickly and confidently review and understand the contents of the typical annual financial report of a governmental unit. The complexity and mixed accounting practices of these reports makes it almost impossible for lay persons to determine the financial condition of a governmental entity. This may undermine support for much needed and worthwhile programs, including tax and revenue sharing proposals.

In an effort to resolve some of these problems, Coopers & Lybrand proposes a streamlined financial reporting model for governmental entities. Key features of this model include:

• Consolidation of the existing fund types and account groups into a single column;

• The combining of operating liabilities and capital-related liabilities, with both being classified as either current or noncurrent;

• Presentation of a statement of cash flows; and

• The capitalization of infrastructure.

The new type of format is meant to provide a user-friendly financial statement that gives a clear and accurate assessment of overall financial health. For example, an essential feature is the consolidation of all existing fund types and account groups into a single balance sheet. While different user groups, from citizens to oversight bodies, may have a different purpose, and therefore, different need for examining financial data, this single financial "snapshot" would quickly reveal the consolidated financial condition of the governmental entity. This is much simpler than the current process, which requires accumulating data from four or five different financial statements, each with their own format and accounting method.

Another important feature of our proposed model is the inclusion of the capitalization of infrastructure, which currently is not reflected on most governmental financial statements. Because of the importance of infrastructure to the commercial and personal vitality of communities, in addition to the tremendous costs of replacing or renewing infrastructure, we believe this aspect of our model should be seriously considered. Capitalization and reporting of infrastructure can provide governmental entities with an opportunity to set aside, through depreciation, the funding that will be required to replace or rehabilitate the infrastructure when necessary.

Overall, Coopers & Lybrand's proposed model follows several accounting principles that differ from what is generally practiced today, or from what has been proposed by the Governmental Accounting Standards Board (GASB) for future implementation. The differences include:

• Use of the same measurement focus on all programs and activities;

• Recognition of the cost of capital assets in each program through depreciation and interest expense;

• Accrual of interest on bonds payable; and

• Consideration of taxes levied for debt principal payments and capital outlay to be a contribution of capital.

This streamlined financial reporting model is meant to stimulate discussion among state and local governments. It could be implemented, initially, as a supplement to a governmental entity's comprehensive financial reporting format, much as a for-profit corporation's annual report supplements its more detailed 10-K filing.

Finally, a streamlined financial reporting model will result in a financial report that is more useful for more people. In the long run, this will instill all constituencies with greater confidence in the operations of state and local governments. •

September 1993 / Illinois Municipal Review / Page 5