Annual Financial Reporting Options: Cash-Basis

This blog article is the third of a series of four. The first blog described the authority and context for the two reporting options for Washington local governments. The second blog described the GAAP-reporting option, its intent, and the variables associated with GAAP reporting. This article will describe the cash-basis reporting option and our last in this four-part series will evaluate the pros and cons to each approach.

Cash-Basis

Cash-basis accounting, also known as Other Comprehensive Basis of Accounting (OCBOA), is an accounting system that only recognizes and records income and expenses as they are received or paid. As such it is a single-entry accounting system similar to an individual’s checkbook. This method of accounting is nonconforming to Generally Accepted Accounting Principles (GAAP), and audited financials by the state auditor’s office provide a declaratory statement as such.

While cash-basis accounting is utilized by many local government entities nationwide for accounting purposes, these entities frequently have to ‘report’ on a GAAP basis at the end of the fiscal period. This conversion usually requires the local government entity to hire an outside accounting firm to assist with the conversion each year at report time.

In Washington State, the accounting and reporting requirements are prescribed by the Washington State Auditor’s Office (SAO) under Chapter 43.09 RCW, and more specifically their authority granted RCW 43.09.200. The SAO allows local governments the option to report on either a GAAP or cash basis.

The Intent of Cash-Basis Accounting

The primary intent of cash-basis accounting is to provide a simplified method of accounting that represents a cost savings to local government, especially smaller jurisdictions where there is limited staffing and fewer resources to comply with the multitude of GAAP and GASB (Governmental Accounting Standards Board) requirements.

The financial reports for cash basis are generally simpler and easier to understand, which is advantageous to staff and management, but also for elected officials who utilize these reports to make informed decisions about the services its local government is providing. Additionally, the financial reports align with adopted budgets, allowing for a comparative analysis to assure budget compliance.

Cash basis provides an accurate picture of how much cash is on hand and provides a clear presentation of cash flows.

Cash-Basis Financial Statements  

A local government that has opted to account and report on a cash basis must rely upon SAO‘s BARS Cash-Basis Manual for reporting requirements and format of the financial statements, supplemental schedules, and notes to financials. This is a significant departure from GAAP-reporting entities that look to GAAP and GASB for these requirements. The BARS cash-basis guidance typically arrives in the month of January following the close of the fiscal year being reported. There are changes to the BARS cash-basis guidance every year, and unlike the GASB statements, which provide for a comment period, there is no comment period for this guidance, and the new requirements are frequently retroactive to the fiscal period just completed.

For cash-basis reporting entities (and to some extent, GAAP-reporting entities), regular updates to the reporting forms as well as new compliance issues require additional staff time in order gain a complete understanding of how to file a full and accurate financial report by the required deadline. Examples of areas that have required significant staff time to prepare are pension liabilities, other post-employment benefit (OPEB) liabilities, fiduciary fund analysis, and other GAAP-required reporting issues that are now being incorporated into the cash-basis report.

The variables for cash-basis financial reporting requirements are primarily associated with entity type (multipurpose government entity vs. special purpose districts) and size. At the core of the financial report is the reporting of all “cash” transactions that have occurred throughout the fiscal period that would impact the funds cash position. In other words, beginning cash-by fund plus all income received throughout the fiscal period, minus all expenditures/expenses during the year equal ending cash of the fund(s).

Variables for cash-basis financial reports

The type and size of your entity is a factor in setting the reporting requirements for cash-basis financial reporting, as demonstrated in the four sample entities below.

Multipurpose entities (cities, towns, and counties) with an annual income over $2,000,000

Annual financial report components for these entities include SAO-prescribed financial statements that summarize cash transactions, required supplementary information, and cash-basis supplemental schedules.

Financial statements to be completed are:

• Fund level financial statements for all governmental and proprietary funds (C4),
• Fund type financial statements for fiduciary activities (C5), and
• Notes to the financial statements, which includes budgetary statements.

Required supplementary information to be completed includes:

• Schedule of liabilities and
• Schedule of expenditures of federal awards

SAO-required supplemental schedules for cash-basis entities to be completed includes:

• Detailed - revenues/expenditures/expenses (Schedule 01),
• Cash activity and summary of bank reconciliations (Schedules 06, 07 and 11),
• Schedule of state financial assistance (Schedule 15),
• Public works for cities and counties (Schedule 17),
• Labor relations consultants (Schedule 19),
• Rural counties – sales and use tax for public facilities (Schedule 20), and
• Risk management (Schedule 21). 

Multipurpose entities (cities, towns, and counties) with annual income under $2,000,000

These entities may eliminate the financial statements and notes if total revenues are less than $2,000,000 and they do not have debt covenants, a contract, or local policy requiring the completion. In light of the SAO online filing system, which automatically generates financial statements, it is both a recommendation and a best practice to present the financial statements along with the remaining elements of the annual financial report. Note: If presented within the report it will require the completion of the notes to financials.

The additional reporting requirements include:

• Required supplementary information (see above), and
• SAO-required supplemental schedule for cash-basis entities (see above) plus Schedule 22 (assessment questionnaire).

Special purpose entities with an annual income over $2,000,000

Annual financial reports for these entities will include financial statements, required supplementary information, and cash-basis supplemental schedules.

These entities should include the following financial statements:

• Fund level financial statements for all governmental and proprietary funds (C4), 
• Fund type financial statements for fiduciary activities (C5), and
• Notes to the financial statements, which includes budgetary statements.

As well as the required supplementary information:

• Schedule of liabilities and
• Schedule of expenditures of federal awards. 

And the following SAO-required supplemental schedules for cash-basis entities:

• Detailed - revenues/expenditures/expenses (Schedule 01),
• Schedule of state financial assistance (Schedule 15),
• Labor relations consultants (Schedule 19),
• Risk management (Schedule 21), and
• Assessment questionnaire (Schedule 22), which is a requirement for many special purpose districts.

Special purpose entities with annual income under $2,000,000

These entities may eliminate the requirement for financial statements and notes (see multipurpose districts above) but must complete:

• Required supplementary information (see above), and
• SAO-required supplemental schedules for cash-basis entities (see above) — when applicable — plus Schedule 22 (assessment questionnaire).

Conclusion and Resources

This article provides a few examples of the differences between GAAP- and cash-basis reporting as well as some of the advantages for cash-basis accounting and reporting; foremost of which is the simplified accounting of transactions and ease of understanding of the financial information being provided within the annual report.

In the last article of this four-part series we will further explore the advantages and disadvantages of each of these report types in the hopes that you will have sufficient information to make an informed decision about the most appropriate accounting and reporting system that should be used by your government entity.