Agenda - Council - 01/13/1981 - Laserfiche WebLink

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.' {, MUNICIPAL ACCOUNTING AND FINANCIAL REPORTING Standard & Poor's Policy Statement An integral part of Standard & Poor's municipal rating process is the timely receipt and analysis of financial statements certified by independent certified public accountants, or appropriate state or local auditing agencies. With the 1979 Restatement of Governmental Accounting and Financial Reporting by the National Council on Governmental Accounting (NCGA), GAAFR for municipal purposes is recognized as GAAP, generally accepted accounting principles. With the need for improved, timely and standardized finandal accounting and reporting becoming increasingly evident to many of the participants in the municipal marketplace, including issuers, analysts, underwriters and i.tars, as well as the Congress a, n,d state legislatures, it i ropriate that S&P state its posititon on this subject. Although S&P does not and cannot perform an audit function, S&P can and must take into account in its rating process the type and quality of reporting and accounting standards being used by the isspers under review. All financial statements submitted to S&P. either in connection with a rating request for a bond sale or for a review. are expected to be preparedHin' ac;cordance with Generally Accepted Accounting Principles (GAAP). Where legal requirements for recording transactions differ from GAAP. the accounting system employed should make provision for both, but in the preparation of general financial statements, GAAP must take precedence. These statements should be independently audited. either by a certified public accounting firm. or by a qualified independent State or local agency. on a timely basis. i.e. no later than six months after the fiscal year-end. The audit . include the auditor's opinion. as well as com pre- ti ve disclosure notes covering such items as a summary of significant accounting policies (fund accounting, encumbrances, reserves. investments, 'etc.). any departures' from GAAP which materially impact results. status of pension plans. lease obligations if applicable. contingent liabilities (such as vacation and sick leave). and any pe!'!ding litigation. Also. although not part of the audit itself. the auditor's management letter is an extremely useful dvwment in that it may point out any weaknesses or deficiencies in financial and/or management controls. If such a management letter exists. it should be furnished to S&P; if none exists. a written statement to that effect should be furnished to S&P. The standards of accounting employed refer to the point in time when revenues. expenditures/expenses. transfers and the relative assets and liabilities are recognized in the accounts and reported in the financial statements. They relate specifically to the timing of the measurements being made on either the cash or accrual method. Under the cash basis of accounting. revenues and transfers in are not recorded until cash is received, and expenditures or expenses and transfers out are recorded only when cash is disbursed. Under the accrual basis of accounting, most transactions are recorded when they occur. regardless of when cash is received or disbursed. Items not practicably measurable until cash is received or disbursed are accounted for at that time in both commercial and governmental accounting. as may be items whose measurements would be approxi- mately the same under either basis or \""hich are immaterial. The accrual basis is the superior method of accounting for the economic resources of any organization. It results in accounting measurements based on the substance of transactions and events. rather than merely when cash is received or disbursed, and thus enhances their relevance. objectivity. timeliness. completeness, and comparability. With this in mind, the use of the accrual basis to the fullest extent practicable in the government environment is preferred. The accrual basis is necessarily applied somewhat differently in the enterprise funds than in the general governmental funds where the modified accrual basis is used. However. the cash basis of accounting is not appropriate. The modified accrual basis has been extensively defined in the GAAFR Restatement with the above standards. In the absence of financial reporls prepared in accordance with the aforementioned guidelines. S&P will specifically reflect such absence in its rating process as a nega tiv~ factor and where the report is not timely or is substantially deficient in terms of reporting. wiII not rate at all. Each issuer is expected to immediately furnish to S&P any material changes in. or additions to, any inFormation contained in the aforementioned documents. Where cash basis accounting is modifjed to account for liabilities and/or encumbrances. such modification will be considered by S&P and may serve to lessen the negative impact upon the financial reporting considerations in the rating process. For additional information on how this policy may be implemented please contact Hyman Grossman (212) 248-2197 or Frank S. Rizzo (212) 248-2471, Vice Presidents of Municipal Bond Ratings. November 26.1980 1" Byron Klapper Director Special Fixed Income Research (212) 248-2484 6