Concepts Statement No. 3 Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements Issued: April 2005

Concepts Statements  Not used to prescribe the financial reporting requirements that apply to a particular item or event.  Provides GASB with the conceptual foundation to consider the merits of alternative approaches to financial reporting.  Assist preparers and users in better understanding fundamental concepts underlying financial reporting.

Objective  The objective of this Statement is to provide conceptual guidance regarding the placement of information within general purpose external financial reports that contain the basic financial statements, notes to basic financial statements, and supporting information related to basic financial statements.

Overview  The statement defines and provides criteria for communication methods used in general purpose external financial reports. –Recognition in basic financial statements –Disclosure in notes to basic financial statements –Presentation as required supplementary information (RSI) –Presentation as supplementary information.

General Purpose External Financial Reporting

Communication and Financial Reporting  All communication requires that a sender (that is, a communicator) generate a message or messages, which are received and understood by a recipient. In the communication of accounting information, the sender of messages is the preparer. Messages are contained in financial reports. The recipient of messages is the user of financial reports.

Essential Elements for Communication  Preparer  Financial Reports  User  GASB –Roles and responsibilities of the preparer, user, and GASB are discussed.

What Should Be Included?  Two conditions should be met before an item of information would be considered for inclusion in a general purpose external financial report. –The item is consistent with the objectives of state and local government financial reporting (GASB Concepts Statement 1, paragraphs ) –The item meets the basic characteristics for the communication of information in financial reports (GASB Concepts Statement 1, paragraphs 62-68).

Where?  Where should an item of information that meets the two conditions be placed within a general purpose external financial report? –The proposed definition and criteria of communication methods are used to help answer this question. –Definitions and criteria are applied based on a hierarchical approach.

Hierarchical Approach  Report in financial statements if it meets definition and criteria for recognition, otherwise –Disclose in Notes to F/S if it meets definition & criteria for notes, otherwise  Present as RSI if it meets definition & criteria for RSI, otherwise –May choose to present as SI if it meets definition & criteria

Financial Statement  A governmental financial statement is a tabulation of amounts, derived from accounting records and expressed in words and dollars, that displays either (a) the financial position of the reporting unit (that is, the group of activities covered by the financial statement) at a moment in time or (b) inflows and outflows of resources from transactions or other events during a period of time. Amounts recognized in financial statements are assets, liabilities, and residual balances and the effects of transactions and other events that result in changes in those assets, liabilities, and residual balances.

Notes to Financial Statements  Notes to financial statements are integral to financial statements and are essential to a user’s understanding of financial position or inflows and outflows of resources. Notes provide: –Descriptions of the accounting and finance- related policies underlying amounts recognized in financial statements –More detail about or explanations of amounts recognized in financial statements –Additional information about financial position or inflows and outflows of resources that does not meet the criteria for recognition.

Notes to Financial Statements  Notes have a “clear” and “demonstrable” relationship to information in the F/S and are “essential” (“indispensable”) to understanding by user with “reasonable understanding” of govt. and public financing activities and fundamentals of govt. financial reporting and “willingness to study” info. with “reasonable diligence.”

Supporting Information  Supporting information places basic financial statements and notes to basic financial statements in an appropriate operational, economic, or historical context. This information either is required by GASB pronouncements to be presented with the basic financial statements and notes to basic financial statements, is required to be presented by laws or regulations, or is presented at the election of the preparer.

Required Supplementary Information (RSI)  RSI is supporting information that the GASB has concluded is essential for “placing basic financial statements and notes to basic financial statements in an appropriate operational, economic, or historical context.” RSI is required to accompany the basic financial statements and notes to basic financial statements in a government’s general purpose external financial report.

Supporting Information  RSI has clear and demonstrable relationship to info. In the basic financial statements or notes

Supplementary Information (SI)  SI is supporting information that is useful for placing basic financial statements and notes to basic financial statements in an appropriate operational, economic, or historical context. SI is presented with the basic financial statements, notes to basic financial statements, and RSI in a government’s general purpose external financial report. Although the GASB does not require SI to be presented, preparers of governmental financial reports who elect to present SI (or are otherwise required by law or regulations to present SI) with their basic financial statements, notes to basic financial statements, and RSI should follow any applicable GASB-issued or cleared guidance regarding the format and content of that information.