FAR coverage for governmental MD&A, RSI, budgetary comparisons, and supplementary disclosure requirements.
Management’s Discussion and Analysis (MD&A) and Required Supplementary Information (RSI) play a pivotal role in state and local government financial reporting. Because the financial statements of governmental entities often involve unique accounting and reporting requirements, the Governmental Accounting Standards Board (GASB) requires certain additional disclosures and analyses to enhance the transparency, clarity, and usefulness of these reports to taxpayers, elected officials, and other stakeholders. MD&A offers management’s narrative of the government’s financial performance and outlook, while RSI provides further context, such as budgetary comparisons, pension schedules, and information on infrastructure maintenance.
Below, we explore the core concepts, best practices, and detailed examples of how MD&A and RSI integrate with, and complement, the basic financial statements of state and local governments.
Management’s Discussion and Analysis is a required component of a government’s Comprehensive Annual Financial Report (CAFR) — now often referred to as the Annual Comprehensive Financial Report (ACFR). GASB Statement No. 34 introduced MD&A to:
• Provide an easily readable, narrative-based overview of a government’s financial position and activities.
• Enhance the usefulness of the financial statements by bridging the gap between the highly technical information in the statements and the broader user community.
• Highlight significant changes, trends, and known facts that could impact future financial results.
Public officials and interested citizens frequently look to MD&A for a summary of financial highlights, major financial trends, and any concerns regarding the government’s financial stability. MD&A draws attention to the most significant metrics and events, making the complex compilation of financial statements more approachable.
Although the exact structure can vary, GASB guidelines indicate that the following elements should typically be addressed in the MD&A for state and local governments:
• Financial Highlights
– A high-level summary of the government’s most significant financial developments, such as changes in net position, total revenues, total expenses, fund balances, or key economic factors.
• Overview of the Financial Statements
– A concise description of the government-wide financial statements (governmental activities, business-type activities), the fund-level statements (governmental funds, proprietary funds, fiduciary funds), and the notes that accompany the financial statements.
– Explanation of measurement focuses and bases of accounting (e.g., modified accrual vs. full accrual).
• Analysis of Financial Position and Results of Operations
– Management’s interpretation of why certain line items have increased or decreased from the prior period(s).
– Discussion of changes in fund balances or net position.
– Trends in revenues, expenditures/expenses, and the government’s overall fiscal health.
• Budgetary Highlights
– Narrative on how the actual results compared to the originally adopted and final amended budgets for major funds.
– Explanations of major variances between budgeted amounts and actual results.
• Capital Assets and Long-Term Debt Activity
– Discussion of major capital asset acquisitions, disposals, ongoing projects, and future capital plans.
– Summary of changes in long-term liabilities, including new debt issuances or retirements.
• Infrastructure Asset Reporting (if using the modified approach)
– When applying the modified approach for infrastructure assets (e.g., roads, bridges), management can discuss how condition assessments ensure assets remain at or above condition levels established by the government.
• Economic Factors and Next Year’s Budgets and Rates
– A forward-looking perspective, highlighting any anticipated changes in tax rates, service demands, potential grant funding, or broader economic pressures that may affect the government’s financial operations in the near future.
• Contact Information
– Readers are typically informed about how to obtain additional information on the government’s finances (e.g., finance office contact, website link).
This structured approach helps stakeholders quickly locate key financial indicators and understand the government’s stewardship of resources.
MD&A serves as an executive summary, presenting complex fiscal data in an accessible format. Its narrative style and visual aids may include:
• Graphs, charts, or tables illustrating revenue and expenditure trends.
• Simple ratio analysis (current ratio, debt-to-revenue, or other performance metrics).
• Year-over-year comparisons to highlight the evolution of major funds and governmental activities.
• Explanations of unusual or nonrecurring items (such as one-time grants, unexpected legal settlements, or significant bond issuances).
By synthesizing data, MD&A provides readers a more holistic view of the government’s finances than the basic statements alone. It also permits management to defend, clarify, or elaborate on reported financial outcomes and future expectations.
The Governmental Accounting Standards Board classifies certain critical disclosures beyond the basic financial statements and notes as Required Supplementary Information (RSI). RSI has an elevated status above “supplemental” or “optional” disclosures. Governments must include RSI in order to conform to generally accepted accounting principles (GAAP) for governmental entities.
RSI typically includes (but is not limited to):
• Budgetary Comparison Schedules.
• Pension and Other Postemployment Benefit (OPEB) Schedules.
• Infrastructure Condition and Maintenance Data.
• Information on Risks and Uncertainties (where specified by GASB).
While MD&A precedes the basic financial statements and notes, RSI usually follows them, forming more in-depth support for the user’s understanding of specific governmental activities.
One of the most recognizable forms of RSI in state and local government reporting is the budgetary comparison schedule. GASB requires that governments with legally adopted budgets present a comparison of the:
• Original adopted budget.
• Final amended budget (reflecting any authorized changes).
• Actual amounts for the reporting period.
This schedule often includes both revenues and expenditures/expenses for major governmental funds. Any differences from the legally adopted budget must be clearly displayed. Many governments provide variance columns to aid users in assessing how closely spending and receipts align with the planned amounts. A variation from budget can be explained in MD&A for context, especially if significant overruns or shortfalls occurred.
Budgetary comparison schedules illuminate how well a government adheres to its legally adopted budget. They reveal any variances that might point to either conservative or ambitious budgeting, unforeseen economic events, or changing programmatic needs. Stakeholders gain foresight into the government’s budget discipline, resource allocation choices, and potential need for mid-year adjustments.
Some governments choose to include notes to the RSI to clarify budgetary procedures, basis-of-accounting differences, and any reconciliation with GAAP-based results. For example, a government may prepare its budget on a cash basis, while the fund financial statements use a modified accrual basis. The RSI notes would detail the key differences so that readers can reconcile the two.
Many governments provide defined benefit pension plans or other postemployment benefits (OPEB) — healthcare, life insurance, or similar post-retirement coverage. GASB Statements No. 67, 68, 74, and 75 outline how these liabilities and expenses should be measured and presented.
• Schedule of Changes in Net Pension (or OPEB) Liability and Related Ratios.
• Schedule of Employer Contributions (showing statutorily or actuarially determined contributions and the actual amount contributed).
• Schedule of Investment Returns (if applicable).
These schedules often cover multiple years (e.g., 10-year trend data) to illustrate funding progress, changes in covered payroll, and other relevant metrics. Users can assess whether the government is fulfilling its funding obligations.
Because pension and OPEB obligations can represent substantial long-term commitments, RSI transparency is critical for evaluating long-term financial health. If pension or OPEB liabilities grow faster than the government’s resource base, it may signal future fiscal stress.
Governments with large infrastructure networks (roads, bridges, tunnels, water/sewer systems) may elect to use the modified approach under GASB Statement No. 34. This approach requires enhanced disclosures in RSI if governments do not depreciate infrastructure assets in the traditional manner. They must:
• Provide information on the assessed condition of infrastructure assets.
• Disclose the estimated costs to maintain and preserve these assets at a target condition level.
• Demonstrate whether they are meeting that condition level based on actual maintenance spending and results.
This RSI provides stakeholders with a clearer understanding of whether the government invests adequately in maintaining critical public infrastructure.
Governments issue financial statements to report their financial position (balance sheet), results of operations (statement of revenues, expenditures/expenses, and changes in net position/fund balances), and cash flows (if presenting proprietary funds). The notes to the financial statements add further critical details (e.g., accounting policies, outstanding obligations, contingencies).
MD&A and RSI integrate with these statements in several crucial ways:
• MD&A introduces readers to the core statements, pointing out major changes and explaining how to interpret key figures.
• Budgetary comparison schedules in RSI clarify the relationship between stated budgetary policies and actual resource inflows/outflows.
• Pension and OPEB schedules detail significant long-term commitments, bridging the gap between short-term fund-based statements and government-wide, accrual-based reporting.
• Infrastructure condition data highlights the government’s approach to capital asset maintenance rather than depreciation, ensuring a complete picture of capital spending priorities.
Together, these elements form a holistic disclosure framework. MD&A focuses on the “why” behind changes, while RSI dives deeper into the details and trends that support the fundamental figures.
Below is a simple diagram illustrating how MD&A precedes and intertwines with the government’s basic financial statements, notes, and RSI in a typical ACFR:
flowchart TB
A("MD&A") --> B["BASIC FINANCIAL STATEMENTS <br/>(Government-Wide & Fund-Level)"]
B --> C("Notes to the Financial Statements")
C --> D("RSI")
D --> E("Comprehensive Understanding of Gov. Finances")
• MD&A: Provides narrative introduction and context.
• Basic Financial Statements: Present the “core” data (government-wide, fund-level).
• Notes: Offer critical disclosures on methods, commitments, policies, and contingencies.
• RSI: Supplies supplementary looking-forward and looking-deeper data (budgets, pensions, etc.).
• Together: Creates a comprehensive picture.
Imagine a mid-sized city, River Glen, that maintains both governmental activities (general fund, special revenue funds) and business-type activities (municipal water utility). Its annual report might include:
• MD&A Highlights:
– Revenue growth in sales tax due to increased local commerce.
– Explanation of an unusual spike in capital expenditures because of the purchase of new firefighting equipment.
– Discussion of a bond issuance to fund road rehabilitation.
– Forward-looking analysis mentioning ongoing negotiations for a federal infrastructure grant.
• Budgetary Comparison RSI (General Fund):
– Original budget anticipated a slight surplus.
– Final budget increased public safety spending after a state grant was received mid-year.
– Actual results showed marginal underspending.
– Overall, the city performed slightly better than budget due to conservative revenue projections.
• Pension RSI:
– River Glen’s 10-year trend schedule shows that net pension liability has fluctuated but remains under control thanks to consistent contributions.
– Employer contribution schedule indicates the city regularly contributes the actuarially determined amount.
– Users can see a stable pattern that signals prudent fiscal management of pension plans.
• Infrastructure Condition RSI:
– Using the modified approach for roadway infrastructure, city management provides a schedule showing targeted vs. actual pavement condition index (PCI).
– The city aimed for an average PCI of 70 on all major roads; the actual measure ended at 71, slightly exceeding the target.
– Disclosures highlight that maintenance spending is on track to maintain satisfactory conditions, underscoring the city’s commitment to preserving essential infrastructure.
By integrating these components, the MD&A and RSI give stakeholders a grounded, data-backed story about River Glen’s successes, challenges, and stewardship of public resources.
• Best Practices
– Craft a concise, easy-to-read MD&A, avoiding overly technical language.
– Use charts and graphs in MD&A to engage readers visually.
– Clearly reference basic statements and notes when discussing major events.
– Provide robust disclosures for budgetary variances, explicitly highlighting reasons for significant differences (e.g., unanticipated revenue sources, over/under spending).
– Comply rigorously with GASB requirements for pension, OPEB, and infrastructure condition RSI.
• Common Pitfalls
– Providing incomplete or boilerplate MD&A that fails to address specific local developments.
– Omitting key RSI schedules, leading to a departure from GAAP and a potentially modified audit opinion.
– Inaccessible explanations that use excessive technical jargon or fail to tie financial data to real-world outcomes.
– Failure to reconcile budgetary amounts with GAAP-based amounts, creating confusion for stakeholders.
Future accountants, auditors, and CFOs in government environments must diligently master MD&A and RSI requirements. Above all, they should recognize that compliance is essential not only for audit standards but also to enhance transparency, foster public trust, and facilitate internal decision-making.
Students and practitioners seeking deeper insights into GASB standards should:
• Review GASB Statements No. 34, 67, 68, 74, and 75.
• Examine several published ACFRs from local governments with diverse economic and demographic profiles.
• Compare different approaches to infrastructure asset reporting in RSI.
By exploring these areas thoroughly, you will develop a deep understanding of how MD&A and RSI contribute to the completeness and clarity of government financial reporting.
• Governmental Accounting Standards Board (GASB). Official Pronouncements and Implementation Guides: https://www.gasb.org
• Selected State and Local Government ACFRs: Review actual published financial statements accessible on many government websites.
• GASB Statement No. 34: Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments.
• GASB Statement No. 67 and 68: Pension standards.
• GASB Statement No. 74 and 75: OPEB standards.