Using charts and graphs to improve management's discussion and analysis.

• Author: Chase, Bruce W.

State and local governments are currently implementing the most significant financial reporting changes in the history of government financial reporting. Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, requires governments to produce new government-wide information using essentially the same measurement focus and basis of accounting as business organizations. GASB 34 also requires governments to present a Management's Discussion and Analysis, or MD&A, with their basic financial statements. MD&A is an important new reporting requirement for governments.

The purpose of the MD&A is to provide an objective and easily readable analysis of a government's financial activities based on currently known facts, decisions, or conditions. In requiring the MD&A, the GASB acknowledges the value to stakeholders of management's knowledge about transactions, events, and conditions reflected in government financial reports, as well as the value of management's knowledge of the fiscal policies governing government operations. The MD&A allows a government's financial management the opportunity to present both a short-term and long-term analysis of those activities. The GASB considers the MD&A a significant step in broadening the communication base of GAAP reports.

GASB 34 also encourages the use of charts, graphs, and tables in the MD&A to enhance the understandability of the information. GASB's first implementation guide on GASB 34 illustrated the use of simple charts to communicate key information. The illustrative MD&A in the implementation guide uses pie charts to reflect the relative importance of the various revenues and expenses. GFOA also uses charts in the example MD&A included in the GASB 34 edition of Governmental Accounting, Auditing, and Financial Reporting, or GAAFR. In addition to pie charts, the GAAFR MD&A illustration includes bar charts to reflect the relationship between program revenues and expenses.

Given the expectations that the MD&A will (1) enhance the usefulness of the basic financial statements for many users by providing management's analysis and (2) expand the use of the basic financial statements (or that the MD&A will be more widely read than the statements), it is important that the MD&A is an effective, understandable communication. The graphs and charts in the GASB implementation guide and in the GAAFR demonstrate some ways that charts and graphs can be used to improve the MD&A. The importance of effective communication in a document expected to have broad use (and, in many cases, use by less sophisticated users) warrants evaluating whether other charts and graphs can be used to more effectively communicate the information and analysis that management believes will benefit users. After a brief summary of the information required in MD&A, this article explores the types of charts that a government should consider using in its MD&A.

MD&A REQUIREMENTS

GASB 34 specifies the items that must be in the MD&A, and governments are required to limit their discussion to these items only (GASB 38 clarified this point). However, the MD&A requirements are somewhat general. Governments should effectively address the most significant items affecting financial operations and avoid "boilerplate discussion."

The MD&A should precede the basic financial statements and provide an objective and easily readable analysis of the government's financial activities based on currently known facts, decisions, and conditions. Governments should ask: What are the most significant financial changes to the government this year and the major financial issues facing the government? The MD&A should describe and explain the reasons...