Data-driven decision-making is central to a properly functioning finance team, and the cornerstone of this process is the meticulous analysis of an organization’s financial data. Government entities have financial reporting obligations just like their private sector counterparts, and the Annual Comprehensive Financial Report (ACFR) is a pivotal tool in this endeavor.
In this blog piece, we explain how the budget offices, controller’s offices, and treasury departments within government agencies and public companies use the ACFR to evaluate financial performance for effective decision-making, mirroring the private sector's financial planning and analysis (FP&A) process.
What is an Annual Comprehensive Financial Report?
An Annual Comprehensive Financial Report is a detailed and audited financial statement that provides a holistic view of a government entity’s financial performance.
It is based on standards laid down by the Governmental Accounting Standards Board (GASB), going beyond the basic financial statements (balance sheet, income statement, cash flow statement) to offer insights into each entity's financial health and long-term sustainability.
Before October 2021, the ACFR was known as the Comprehensive Annual Financial Report (CAFR), but the GASB switched the terminology to ACFR after it learned that in some countries, CAFR sounds like an offensive word when spoken.
ACFRs are typically published on the official website of the reporting entity or on that of the municipality that controls it. They can also be obtained through public records requests or by contacting the entity's finance or accounting department.
Non-profit organizations that receive significant government funding or are closely affiliated with governmental activities are often required to adhere to GASB standards and will have to submit an ACFR. This is particularly true for entities like public universities, governmental hospitals, and other quasi-governmental organizations that have a dual nature. In those cases, their financial activities need to align with governmental accounting practices.
However, the majority of NPOs are not dependent on government agencies, and they follow Financial Accounting Standards Board (FASB) standards.
What is The Purpose of The Annual Comprehensive Financial Report?
The primary purpose of the ACFR is to provide transparency and accountability to stakeholders, including citizens, investors, creditors, and oversight bodies. It enables them to:
- Assess Financial Health: Analyzing financial data to determine the entity's viability, including its assets, liabilities, revenues, and expenses.
- Track Financial Performance: Monitoring the entity's progress towards its financial health and operational goals.
- Make Informed Decisions: Supporting financial modeling programs based on the entity's investment, budgeting, and resource allocation decisions.
- Ensure Compliance: Verifying that the entity adheres to accounting standards and legal requirements.
Let’s explore why these attributes are so important.
The Importance of ACFRs in Financial Planning
ACFRs serve as a critical financial analysis resource for business performance professionals within government entities and public companies. They provide valuable insights and financial models that support several key functions:
Enhancing Decision-Making
The key areas that determine the entity's trajectory are:
- Informed Resource Allocation: The ACFR provides a comprehensive picture of the entity’s financial resources, enabling the finance team to make informed decisions about the use of funds and prioritizing spending based on the business performance and strategic goals.
- Performance Evaluations: By comparing current financial results to historical trends and budgeted figures, finance managers can evaluate the entity's performance, identify areas of strength and weakness, and inform corrective actions.
- Risk Assessment: The ACFR's disclosures about contingent liabilities, debt obligations, and economic factors help finance teams assess and manage financial risks effectively.
Supporting Strategic Planning
Several datasets must be compiled to guide projects and development:
- Long-Term Financial Forecasting: The ACFR's historical data and trend analysis facilitate the development of long-term financial forecasts, enabling the entity to plan for future growth and investment opportunities.
- Scenario Planning: By modeling different economic scenarios and their potential impact on the entity's finances, finance managers can help develop contingency plans and ensure financial stability.
- Goal Setting: The ACFR helps identify key performance indicators (KPIs) — such as, liquidity for short-term obligations, long-term viability, service delivery costs, and development program metrics— to set realistic financial goals that align with the entity's strategic objectives.
Improving Transparency and Accountability
Voters closely monitor how their elected officials manage public sector organizations, and the results affect individual politicians and the administrations they represent. In this context, a trustworthy financial reporting process comes into play on several levels, such as:
- Public Scrutiny: The ACFR is a public document that holds the entity accountable for its financial stewardship. It allows citizens to understand how their tax dollars are being utilized.
- Stakeholder Communication: The ACFR serves as a valuable communication tool, providing stakeholders with a clear and comprehensive overview of the entity's performance and activities.
- Regulatory Compliance: The ACFR ensures adherence to accounting standards and legal requirements, demonstrating the entity's commitment to financial integrity and responsible governance.
How to Prepare an Annual Comprehensive Financial Report
The ACFR comprises three main financial analysis sections:
1. Introductory Section
This section sets the stage by providing context and an overview of the reporting agency or department. It typically includes:
- Letter of Transmittal: A formal letter from management introducing the report and highlighting key achievements or challenges.
- Organizational Chart: A visual representation of the entity's structure and key personnel.
- Management's Discussion and Analysis (MD&A): A narrative analysis of the entity's financial performance, discussing key trends, risks, and future outlook.
2. Financial Data Section
This section forms the core of the ACFR, presenting the audited financial statements along with detailed notes and supplementary information. It includes:
- Basic Financial Statements:
- Government-wide Financial Statements: Providing an overview of the entity's overall financial position and activities.
- Fund Financial Statements: Presenting financial information for individual funds and creditors, demonstrating how resources are used for specific purposes.
- Notes to the Financial Statements: Providing detailed explanations and disclosures related to the financial statements.
- Required Supplementary Information (RSI): This includes additional information mandated by accounting standards, such as pension disclosures or budget-to-actual comparisons.
3. Statistical Section
This section provides a broader context for the financial data by presenting long-term trends and demographic information. It typically includes:
- Financial Trends: Multi-year comparisons of key financial metrics, such as revenues, expenditures, and debt levels.
- Revenue Capacity: Information about the entity's ability to generate revenue through taxes, fees, and other sources.
- Debt Capacity: Analysis of the entity's debt burden and its ability to meet debt obligations.
- Demographic and Economic Information: Data on population, employment, and other economic indicators relevant to the entity's operations.
Tips for Effective Use of Annual Comprehensive Financial Reports
To harness the full potential of ACFRs, treasury officials should adopt the following measures in their financial reporting process:
- Conduct Thorough Analyses: Rather than treating the financial statements, footnotes, and MD&A as a mere status report, analysts can consider their implications to guide decision-making and assess the entity's general direction and outlook.
- Compare to Prior Years: Track changes in annual reports and key financial metrics over time to identify trends and potential areas of concern.
- Benchmark Against Peers: Compare the entity's financial data to that of similar entities to assess relative strengths and weaknesses.
- Utilize Technology: Leverage financial analysis tools and software to streamline data extraction, visualization, modeling, and reporting.
- Collaborate Across Departments: Engage with budget managers, program directors, and other stakeholders to gain insights into the underlying drivers of financial performance.
Examples of ACFRs Put to Good Use
According to publicly available reports and case studies, several government entities have successfully leveraged their ACFRs to achieve a range of strategic objectives.
For example, the City of Phoenix employs its ACFR for scenario planning, proactively preparing for potential economic downturns or natural disasters. In Ohio, the Office of Budget and Management has utilized its ACFR to identify cost-saving measures and enhance efficiency across state agencies.
Additionally, Miami-Dade County's finance team has effectively used its ACFR to bolster transparency and accountability by communicating financial information to the public in a clear and accessible way.
Financial Reporting Done Right
The insights from Annual Comprehensive Financial Reports empower public sector analysts to enhance decision-making and financial performance while handling complex challenges in a volatile economic landscape.
Fluence Technologies specializes in top-tier tools that address key aspects of the ACFR preparation process, such as financial consolidation, close management, disclosure management, and narrative reporting.
Contact Fluence today to help your team achieve their strategic objectives and secure your organization’s financial outlook.
