Watch for These Details as You Prepare Your Annual Financial Report

Learn what not to do and what to look for. This article provides some of the most common errors found in annual financial reports.

As you begin to work on your district’s annual financial report, you have a lot to keep in mind. Whether you’re a first-time preparer or a seasoned veteran, mistakes happen. Let’s take a look at some of the most common errors found in annual financial reports so that hopefully you can avoid them.

Board Certificate Signatures

Texas independent school districts are required to include a Certificate of the Board in the annual financial report they submit to Texas Education Agency (TEA). But many districts forget to mark the certificate “approved” and have it signed by the Board Secretary and President.

Management’s Discussion and Analysis

Designed to provide a narrative explanation of significant financial activity for the year, Management’s Discussion and Analysis (MD&A) is an important part of any government entity’s annual financial report. It is important to:

  • Ensure the MD&A provides the ‘WHY’ behind increases and decreases. All too often, the MD&A provides the ‘what’ – “fund balance increased by $200,000,” but not the ‘why’ (the analysis). Other times, an MD&A will attempt to explain why, but will fall short. For example, an MD&A that explains that fund balance increased $200,000 because property taxes increased still hasn’t answered the ‘why.’ Was it because of a $10,000,000 increase in assessed valuation of real property, a $0.05 increase in the tax rate, or perhaps both?
  • Provide the reason for significant changes in balances and transactions for each of your major funds.
  • Ensure the explanations are logical. For example, indicating that “fund balance increased $225,000 due to an increase in expenditures” doesn’t make sense.
  • Include an analysis of significant variations between original and final budget and final budget and actual for your major funds.
  • Add discussions of capital assets and debt, including detail of current year activity.

Financial Statements

The most common error you will find in the annual financial report is when balances don’t agree. For example: Fund balance doesn’t agree between the statement of revenues, expenditures and changes in fund balance and the balance sheet; individual line items such as accounts payable do not agree between the fund-level and government-wide financial statements; or an amount reported in the financial statements such as capital assets or long-term debt does not agree with the respective footnote.

When preparing your annual financial report, make sure that all amounts reported in the MD&A, notes to the financial statements, required supplementary information and statistical sections agree with the financial statements, where applicable. Be sure to pay close attention during the review process to prevent these kinds of errors.

Some other items to remember are:

  • Headers for balance sheets and statements of net position should be “as of” fiscal year-end while activity statements should be “for the year ended…”
  • Ensure that that TEA data control codes are accurate.
  • Use care in identifying unearned revenue and unavailable revenue. Unearned revenue is used to report resources received in advance of being earned; unavailable revenue, conversely, is reported as a deferred inflow of resources. Generally, resources reported as unearned revenue in governmental funds financial statements also should be reported as such on the government-wide level.
  • Restricted fund balance should reconcile to restricted net position.

An area that has received increased scrutiny lately is the net investment in capital assets classification within net position. Michele Mark Levine, Government Finance Officers Association Director of Technical Services, addressed this topic in a recent webinar, Correctly Calculating Net Investment in Government Assets. She noted that, at a high level, the net investment in capital assets balance is equal to the sum of capital assets and capital deferred outflows of resources less the sum of capital liabilities and capital deferred inflows of resources. However, the calculation has proven challenging because of the wide variety of transactions and other events that must be considered.

Notes to the Financial Statements

Aside from amounts disclosed in footnotes not agreeing to amounts recorded in the financial statements, the most common errors identified in the notes are related to pension and OPEB plans, due to the complexity of these disclosures. Pension and OPEB disclosures should include all required elements, including details by plan type. Note that the Teacher Retirement System of Texas (TRS) annually provides suggested pension and OPEB note disclosures to assist in this area.

Another area of frequent comments relates to budgets. The notes to the financial statements should disclose which funds have legally adopted annual budgets, the legal level on control, and any violations of the budget.

Required Supplementary Information (RSI)

The majority of RSI comments are focused on pension and OPEB schedules including:

  • The schedule of proportionate share of the district’s net pension/OPEB liability should be dated as of the plan’s measurement date, while the schedule of contributions should be dated as of the employer’s reporting date. This means that the two schedules will have different dates. Therefore, the covered payroll amounts should not be the same
  • Be sure to include notes to the schedules that discuss changes in assumptions and benefit terms, if any.

As the old saying goes, the devil is in the details. By paying attention to these areas, you can avoid the stress of finding about errors the hard way: after the fact.

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