Question

Use the internet to review a government's CAFR. Examine the governmental fund financial statements, the governmental activities sections of the government- wide financial statements, and the reconciliations between the two sets of statements. Trace the items that make up the reconciliations back to the financial statements as best you can. Write a brief report explaining the nature of each item of the reconciliation.

Answer 1

The CAFR or the Comprehensive Annual Financial Report consists of a series of financial documentation of the various heads of government expenditure and sources of revenue It is actual statement of the spending and revenue generating activities that the government has sought to undertake in the financial year. It presents a very transparent and clear picture as to how the revenue and expenditure aspects of the government’s agenda has been realised or to say it in simple words, how the government has met the targets that were set by it in the budget earlier , it also shows if there was efficient allocation of the public resources or if there was a deviation of a certain kind, if in case of deviation, the extent of the deviation, its causes and consequences has to be ascertained and implemented in the guidelines in the forthcoming budgets.

The CAFR consists of data compiled by the State governments, the local governments and other government certified accounting staff. It includes both statements of funds generated and spent   by the government as well as the business operations of the Public enterprises as well. The CAFR is more a review of the actual scenario after the implementation of the budgetary recommendations. It is the actual report of the working and administration of the government while showing the discrepancies and reasons for such deviation from the original targets set by the budget.

The Funds Financial Statement shows the various assets and liabilities of the government as in the current period—financial year --the assets consist of revenue generated in the form of cash, investments made, if any, during the present financial year, other dues that are due to the governments and so on.

The liabilities specify any payments that are to be made, any source of revenue that is expected to accrue to the government in the future. Investments, public debt servicing, capital transactions are all included included separately.

The basic fund which acts as a storing place for information regarding all the other unaccounted or miscellaneous funds is the general fund. Certain expenses are direct in nature like police, law and order and so on such overheads are treated as specific funds. Public debt is a very often undertaken macroeconomic tool by the government, the debt servicing is major overhead for the government, any sinking fund created for meeting termination of debt activities should be included under this section. Though sometimes, governments use sources like export surplus and so on to meet the debt and debt related (payment of interest) obligations..

Capital projects, investments, which are long term in nature are treated separately, these could be general or specific in nature depending upon the objective of their investment.

However, care should be taken to understand that all revenue sources and revenue expenditures are for the current or the prevailing financial year, since a budget is an estimated annual financial statement prepared every year and the CAFR and the Government Funds Flow Statements will contain information relating to the revenue and spending activities of the current financial year. The capital receipts (which are long term in nature) that are included could be any recoveries of loans , borrowings and so on that have been undertaken in the present financial year. The capital expenditures would include lending to lower governments, other governments, acquisitions of assets, and so on that are not recurring every year but have to be accounted for in which ever financial that the expenditure has been incurred.

The reconciliation shows the net assets of the government – net assets, the reconciliation statement should include in detail the wide variety of activities, envisaged by the budget and covered by the government. It should also include in detail, activities which are of long term in nature yet may not be represented in the current revenue and expenditure statements of the government.

The revenue receipts of the budget would include both tax and non tax revenue of the government, followed by the capital receipts—loan repayments by the borrowers to whom the government had earlier lent and son on. These are all added as ‘total receipts’, including returns on investment and so on.

The expenditure overheads include governmental spending on plan and non plan expenditures as well as on public debt related expenditure like payment of interest and so on. The total expenditures (both revenue and capital) which have to subtracted form the revenue receipts and capital receipts accrued to the government during the fiscal year should be equivalent to the total funds in the balance sheet.

The reconciliation items relate to the differences in the nature of the budgetary goals and the actual activities presented by the government. These have to be suitably treated, for instance, capital expenditures can be treated as autonomous investment activities in the wide statements of the government. The governments should also disclose any deficit in a clear and transparent manner.