Most governments report multiple departments within the General Fund. It is common for governments to issue a separate financial report for one or more of these departments. In that case, the information presented in the separate departmental report is drawn directly from the General Fund financial statements. No government-wide financial information is presented. Independent auditors render an opinion on the fair presentation of departmental reports based on their conformity with all generally accepted accounting principles (GAAP) applicable to the data presented (e.g., relevant note disclosures).
To date, authoritative accounting and financial reporting standards have not specifically addressed the contents of separately issued financial reports of units that are not legally separate (e.g., departmental reports and reports of individual funds). As a result, there has been uncertainty about what additional information such reports should contain. It would appear that the presentation of certain supplementary information would benefit the users of departmental reports, just as it does the users of the entity’s financial report and the separately issued reports of component units.1
GFOA recommends that the following be included as supplementary information in separately issued reports for departments of the general fund:
Letter of transmittal. The contents should include the following five sections and adhere to certain formating and presentation guidelines:
- Formal transmittal. This section should include all of the following:
- A brief discussion that explains the reason/purpose for the issuance of the separate departmental report;
- A brief discussion of how the departmental report compares/relates to the primary government’s comprehensive annual financial report (CAFR);
- An identification of who is responsible for preparing the separate departmental report (departmental personnel or non-departmental personnel) and an acknowledgement of their responsibility for its contents;
- A brief discussion of the fact that the department’s comprehensive framework of internal control is designed to provide reasonable assurance concerning the information contained in the report;
- A reference to the independent auditor’s report on the fair presentation of the departmental financial statements; and
- Reference to management’s discussion and analysis (MD&A) with an explanation that the two presentations complement one another.
- Departmental profile. This section should include all of the following:
- Types and levels of services provided; and
- A brief summary of the budget process and a brief description of the legal level of budgetary control (if the report presents a department included in a governmental fund with an appropriated annual or biennial operating budget).
- Information useful in assessing economic condition. This section should include all of the following items:
- Discussion of financial trends (last 5 to 10 years) for the largest own-source revenue. If nearly as significant, the second-largest own-source revenue should also be discussed. Avoid duplication of trend data information.
- Subjective information about whether the department’s financial position is likely to improve or deteriorate in the future (e.g., legislative changes that will impact the department, such as a change in the scope of the department’s operations, a change in the type or amount of funding, or the elimination of a revenue source);
- Discussion of long-term financial planning, which should include the following if relevant: 1) the department’s capital budget, 2) revenue and expenditure forecasts and 3) other relevant factor (e.g., the anticipated impact of new capital assets on future operations or a plan to systematically increase the level of fund balance);
- Relevant financial policies (e.g., the use of one-time revenues); and
- Major initiatives (which could focus on items originally highlighted in the department’s budget), along with an update on progress thus far/result for the year covered by the report (e.g., a significant upgrade of facilities).
- Acknowledgments. Acknowledge those who played a significant role in preparing the departmental report or developing/managing the department’s internal control.
- Format and presentation. The department should apply the following guidelines for the preparation and presentation of the letter of transmittal:
- Avoid duplication with MD&A;
- Include applicable subjective information that is not acceptable for MD&A;
- Present on the department‘s letterhead;
- Date the document no earlier than the independent auditor’s report on the departmental report;
- Normally be addressed to citizens, but should also include as addressees the specific audience, if any, for which the department report was issued;
- Have the chief financial officer (CFO) sign;
- Ideally, also be signed by the department head when department personnel are the preparers of the separate report (when the report is prepared by non-department personnel the government’s chief executive officer or chief operating officer may be the appropriate signatory);
- Keep the discussion simple and straightforward; and
- Use charts and graphs to supplement (but not replace) recommended contents.
Trend data. The GFOA recommends that all of the following data, drawn from the reporting entity’s CAFR (i.e., the entity that includes the department as part of its legal entity), be included in a separate departmental report:
- Ten-year information on the department’s net program cost;
- Ten-year information on the number of departmental employees;
- Ten-year information on departmental operating indicators;
- Ten-year information on departmental capital assets; and
- Ten-year information on the department’s largest own-source revenue, the second-largest own-source revenue if it is nearly as significant and other sources believed to be particularly relevant.
1 The inclusion of management's discussion and analysis (MD&A) in departmental reports is addressed in a GFOA best practice (BP) titled Including Management’s Discussion and Analysis in Departmental Reports (approved by GFOA's Executive Board in March of 2004). That BP recommends that governments present MD&A "...in conjunction with departmental reports, individual fund reports, and similar reports."
This best practice was previously titled Additional Supplementary Information for Departmental Reports.