Are Your Notes Turning Into Zombies?

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In reviewing thousands of audited financial reports, one of the most inadequate practices to repeatedly come to light is what’s commonly referred to as “apply ’em and leave ’em.” This practice relates to notes, initially implemented on GASB disclosure standards, merely being replicated continuously to financial statements in a rote fashion.

After years of repetition without reconsideration, such disclosures become zombie notes. They look like a note is supposed to look, meaning all the information is there, but they are lifeless. A lifeless note is not as effective as it should be at informing financial statement users.

Why Don’t Notes Last Forever?

Notes that remain virtually unchanged from year to year, except for updated amounts, stagnate because circumstances change around them. The most effective notes evolve to keep pace with the dynamic environment in which governments operate. Some changes that most significantly affect the effectiveness include:

• Changes in the economy—The national and local economy affect a government’s financial status and performance. Governments also make different finance-related decisions depending on the economy’s health, such as setting tax rates and customer fees, selecting capital projects and how to finance them, and identifying spending priorities in the budget.
• Changes in the government’s financial health—A government’s financial status and performance is the primary message communicated by its audited financial report in any given year. However, the tone and focus of the message may change depending on where a government appears along the spectrum of economic wellbeing—from excellent health to severe distress—and the direction it is heading—improving health or deteriorating health.
• Changes in statutes and regulations—Disclosures about compliance with (and potential violations of) those finance-related statutory and regulatory requirements are an important part of accountability. Each year brings new federal, state, and local laws and regulations relevant to a government’s financial health and management.

How Do You Fight Zombie Notes?

The annual updating of the information in your disclosures is ill-equipped to fend off their potential zombification. Maximizing the effectiveness (liveliness) of notes requires periodically reexamining them.  A reexamination of a note disclosure entails asking more fundamental questions than whether the numbers are up to date:

1. Do the disclosures continue to appropriately reflect the economic substance of the underlying transaction or event? Have we revised the notes to encompass developments in that area (such as creating new investment opportunities) and changes to the nature of the transaction or event?
2. How can we make the narrative sections clearer and easier to understand?
3. Can we employ tabular formats and other means to make the notes more informative?
4. Are the disclosures still speaking to the interests and concerns of the financial statement users? Are we proactively answering the questions that users routinely ask?
5. Do the disclosures fulfill the objectives of the underlying standards or merely “check the boxes”? Are we developing disclosures in the context of the user needs they are intended to meet?

Some of the more extensive disclosure requirements—such as those for pensions and retiree healthcare and deposits and investments—may merit a fresh look every few years. A good rule of thumb might be to reexamine 10% to 15% of your notes each year.

Investment Notes Are a Good Place to Start

CRI’s recent joint webinar with Public Trust Advisers (PTA) on investments covered the related GASB pronouncements, the most recent of which were Statement 72 on fair value and Statement 79 on external investment pools. Both pronouncements were effective with fiscal years ending June 30, 2016. For more information, PTA’s Monday Musings newsletter is a valuable resource that looks at the present economic outlook and provides perspectives on the markets, investment strategies, and the global economy.

It is a vast understatement that much has happened since then that might be relevant to existing investment disclosures. Investment performance is directly affected by the economy’s direction and may alter investment decisions and applicable laws and regulations. As a result, new investments and variations on existing investments arise routinely. The level of concern of financial statement users responds to the types of investments a government has and how they have performed. Investments have their own vocabulary, which may require translation to be meaningful to users.

Contact your CRI advisor for help handling all of your note disclosure needs. With newly acquired expertise, we’re available to address all of your notes and financial statement needs.