BAR CPA Practice Questions: Required Supplementary Information Other than MD&A

In this video, we walk through 5 BAR practice questions teaching about required supplementary information other than MD&A. These questions are from BAR content area 3 on the AICPA CPA exam blueprints: State and Local Governments

The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.

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Required Supplementary Information Other than MD&A

When studying governmental accounting, it helps to think of required supplementary information (RSI) as extra information that governments must provide in addition to the basic financial statements.

For state and local governments, management’s discussion and analysis (MD&A) is one type of RSI, but this blueprint topic focuses on some of the other RSI items that appear in the annual comprehensive financial report (ACFR).

A good way to remember the layout is this:

1. Basic financial statements come first
2. Required supplementary information other than MD&A comes after the financial statements
3. Optional supplementary schedules may come after that

The goal of RSI is to give users more context about the government’s financial activities, budgeting, infrastructure maintenance, and long-term obligations such as pensions.

Budgetary Comparison Information

One of the most important RSI items is budgetary comparison reporting.

Governments are required to present budgetary comparison schedules for:

• The general fund
• Major special revenue funds with legally adopted budgets

These schedules help users compare:

• What the government originally planned to spend and collect
• What the final amended budget looked like
• What actually happened during the year

For example, suppose a city originally budgeted $10 million for public safety expenses. During the year, the budget was amended to $11 million after storm damage increased emergency costs. Actual spending ended up at $10.8 million.

The budgetary comparison schedule would normally show:

• Original budget: $10 million
• Final budget: $11 million
• Actual results: $10.8 million

The government would also explain major differences:

• Why the budget changed from $10 million to $11 million
• Why actual spending differed from the final budget

GAAP vs Budgetary Basis

An important point is that governments do not always prepare budgets using GAAP.

Budgetary comparison schedules may use:

• GAAP
• The government’s budgetary basis
• Another basis used for budgeting purposes

If the schedule is not prepared using GAAP, the government must include a reconciliation back to GAAP.

For example, a government may budget using a cash basis while its financial statements are prepared using modified accrual accounting. The reconciliation explains those differences so users can compare the numbers more clearly.

Optional Supplementary Information vs Required Supplementary Information

Some information is optional supplementary information rather than required supplementary information.

A common example is combining statements for nonmajor funds.

These schedules give additional detail about individual nonmajor governmental funds, but they are optional. Governments frequently include them because they provide useful detail, but they are not required RSI.

That distinction matters because governmental reports contain several different sections, and not every schedule after the financial statements has the same level of reporting requirement.

Infrastructure Reporting Under the Modified Approach

Another major RSI topic involves infrastructure assets reported using the modified approach.

Infrastructure assets include things such as:

• Roads
• Bridges
• Highways
• Tunnel systems

Normally, long-lived assets are depreciated over time. However, governments using the modified approach do not record depreciation on eligible infrastructure assets if they can prove the assets are being properly maintained.

How the Modified Approach Works

Under the modified approach, the government must demonstrate that it is preserving the infrastructure at or above a condition level that it has established.

For example, a county may decide that all major highways should be maintained at a pavement condition rating of 80 out of 100 or higher.

If the government can show that:

• The highways are regularly assessed
• Maintenance is being performed
• The roads are staying at or above the target condition level

then the government may avoid recording depreciation expense on those infrastructure assets.

Instead of depreciation, the government provides additional RSI about the condition and maintenance of the infrastructure.

Required RSI Under the Modified Approach

When the modified approach is used, the government must include several additional pieces of RSI.

This includes:

• The assessed condition of the infrastructure assets for each of the past 5 years
• The estimated annual amount needed to maintain and preserve the assets for each of the past 5 years
• The method used to measure condition
• The condition level the government plans to maintain

For example, a government may disclose:

• Average bridge condition ratings for the past 5 years
• Estimated annual maintenance costs of $15 million each year
• That bridge condition is measured using engineering inspections
• That bridges will be maintained at a minimum rating of 85

This information helps users evaluate whether the government is truly maintaining its infrastructure instead of simply avoiding depreciation expense.

Pension-Related Required Supplementary Information

Governments must also provide pension-related RSI.

One common schedule included in pension RSI is the schedule of actuarially determined contributions.

The purpose of pension RSI is to help users evaluate long-term pension funding trends and obligations over time.

10-Year Presentation Requirement

Governments generally present pension RSI for the past 10 years.

However, there is an important exception:

• If the pension plan has existed for less than 10 years, the government only reports the years available.

For example:

• A pension plan that has existed for 4 years reports 4 years of RSI
• A pension plan that has existed for 7 years reports 7 years of RSI

The government does not wait until a full 10 years becomes available.

Putting It All Together

Required supplementary information other than MD&A gives additional context that cannot always be seen directly in the basic financial statements.

Some RSI focuses on:

• Budget performance
• Infrastructure maintenance
• Long-term pension funding

Other schedules that appear after the financial statements may simply be optional supplementary information.