Local government appropriated budgets in Georgia enjoy the force of law and as such budgetary comparisons are a critical part of information and communication as it relates to internal and external financial reporting. Citizens, governing bodies, oversight agencies, and other interested parties all want to know, “Can the government entity demonstrate compliance with the appropriated budget at the legal level of control?” Therefore, budgetary comparisons are necessary to determine compliance with finance-related legal limitations.
Historically, budgetary comparisons have their roots in Principal 9, Budgeting, Budgetary Control, and Budgetary Reporting of the National Council on Governmental Accounting (NCGA), Statement 1, Governmental Accounting and Financial Reporting Principles. The NCGA is the immediate predecessor of the Governmental Accounting Standards Board (GASB) as the authoritative accounting and financial reporting standard setting body for state and local governments. Those who prepare financial statements should be aware that NCGA Statements and Interpretations are considered to be in effect and should be followed until such time as they are altered, amended, supplemented, revoked, or superseded by subsequent GASB pronouncements.
Principle 9, Budgeting, Budgetary Control, and Budgetary Reporting, required, among other items, that “budgetary comparisons should be included in the appropriate financial statements and schedules for governmental funds for which an annual budget has been adopted.” Governments followed this principle for more than 20 years presenting budget and actual information in both interim and external financial statements. However, there was one flaw in how the information was presented. The guidance did not specify which version of the budget to use for comparative purposes.
Roll forward to GASBS 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and this flaw is corrected. Today governments are still required to provide budgetary comparison information in their financial reports. GASBS 34, however, changed the requirements to add the government’s original budget to that comparison since budget revisions are common events. Requiring governments to report their original budget in addition to their final revised budget adds a new analytical dimension and increases the usefulness of the budgetary comparison.
GASBS 34 requires mandatory budgetary comparisons for the general fund and each major special revenue fund with a legally adopted annual budget. The mandatory budgetary comparison should include the original budget, final amended budget, actuals on the basis of budgeting, and a reconciliation between the budget basis and GAAP based financial statements if the budget is prepared on a basis other than GAAP. The level of detail for the budgetary comparison should be at the function and department level (legal level of control in Georgia). Governments are encouraged, although not required, to present a variance column for the difference between the final amended budget and actual amounts. However, care should be taken to avoid presenting the variance as favorable or unfavorable; rather, use the term variance or difference.
The budgetary comparison can be presented as either a “statement” or a “schedule.” The key difference is that a budgetary statement falls within the scope of the independent audit of the financial statements; whereas, a budgetary comparison schedule presented as a part of required supplementary information (RSI) does not. The Government Finance Officers Association (GFOA) encourages governments to present the budgetary comparison as a basic financial statement rather than RSI as the basic financial statements are audited, thus providing a higher level of assurance on the budgetary comparison. If the required budgetary comparison information is presented as a basic financial statement, the opinion paragraph should refer to the budgetary comparisons for those funds.
Budgetary comparisons presented as RSI should include in the notes to RSI, and not the notes to the financial statements, the following: budgetary basis of accounting, excess of expenditures over appropriations, and a reconciliation between the budgetary basis of accounting and the GAAP based financial statements.
Moreover, if a government prepares a comprehensive annual financial report (CAFR) then supplementary budgetary comparisons are required for each governmental fund with a legally adopted annual (or biennial) budget, regardless of fund type. However, it is important to note that the Georgia Department of Audits and Accounts will cite a government for not including budgetary comparisons for the debt service fund and nonmajor special revenue funds in supplementary information, regardless of whether or not the report is a CAFR. This is because state law requires legally adopted budgets for debt service funds and all special revenue funds as well as demonstrating budgetary compliance at the legal level of control. Violations of the annual appropriated budget, if material, even for funds other than the general fund and major special revenue funds should always be disclosed in the notes to the financial statements.
In summary, demonstrating compliance with the annual appropriated budget at the legal level of control is an essential part of financial reporting. Mandatory budgetary comparisons are required for the general fund and major special revenue funds with legally adopted annual (biennial) budgets. The budgetary comparison should be presented on the basis of budgeting and can be presented as either a statement (audited) or a schedule (RSI). The comparison should include the original budget, final amended budget, and actual. While this article summarizes how budgetary comparisons should be presented in a current GAAP environment, governmental GAAP continues to evolve. The GASB’s Preliminary Views document on Financial Reporting Model Improvements indicates that governments would be required to present budgetary comparison information using a single method of communication—RSI. The GFOA Committee on Accounting, Auditing and Financial Reporting believes that “the absence of meaningful auditor involvement with budgetary reporting greatly reduces the level of reliance users can place on a government’s legal compliance with its budget.”