Guide to Understanding Annual Comprehensive Financial Reports (ACFRs)

ACFR stands for Annual Comprehensive Financial Report . An ACFR is a set of financial statements for a state, municipality or other governmental entity that comply with the accounting requirements established by the Governmental Accounting Standards Board (GASB). It must be audited by an independent auditor using generally accepted government auditing standards.

The ACFR consists of three sections: Introductory, Financial and Statistical.

The Introductory section orients and guides the reader through the report. The Financial section presents the entity's basic financial statements as well as notes to the statements and the independent auditors' report. The Statistical section provides additional financial and statistical data, including data about financial trends that may better inform the reader about the government's activities.

A regular annual report typically presents only basic financial statements about the government. An ACFR, by contrast, presents a wider variety of important information intended to help the reader properly understand the basic statements.

A budget is a plan for a future fiscal period, typically a year, primarily showing how tax revenue will be allocated; a ACFR contains the actual results of the prior year's financial activities.

No . Most state and local governments are required by law to issue basic financial statements, and some, including Texas, are legally required to issue a ACFR as well. Many governments not required to issue an ACFR do so anyway because it represents a best practice in government finance.

GASB sets the standards governing the content of an ACFR. GASB is an arm of the Financial Accounting Foundation, which also administers the Financial Accounting Standards Board that establishes accounting standards for private companies. 

When developing proposals for new standards, GASB solicits feedback from the governmental accounting community through a variety of avenues, including public hearings, public forums, task forces and focus groups. The primary feedback mechanism, however, is a request for written comments from GASB, which anyone can submit.

There is no single, central location for all government ACFRs. Typically, ACFRs are posted on a government's website under "Publications" or "Reports," along with other financial documents such as budgets and performance reports.

ACFRs typically are stored as a PDF available for download. The Texas Comptroller's office provides links to annual reports and ACFRs for certain participating Texas local governments through our Transparency Stars program .

An ACFR presents a wide variety of important information. Depending on the reader's specific focus, various sections might be of interest.

Generally speaking, a reader can find the "high points" by reading through the Management Discussion and Analysis (MD&A) in the financial section. The MD&A describes the previous year's results and key factors influencing them; shows the entity's current financial condition; and provides an overview of likely future prospects.

Long-term debt information can be found in all three general sections (Introductory, Financial and Statistical). The best way to locate debt information is to start with the table of contents and look for the following:

• Introductory Section: May include outstanding debt or other overall debt information in a financial overview included in the letter of transmittal.
• Financial Section:
  • may include debt information in the Management Discussion and Analysis (MD&A).
  • short-term and long-term debt balances are presented on the Statement of Net Position for Governmental and Business-Type Activities. This is akin to the "balance sheet" for most private companies.
  • notes to financial statements may include:
    • summary of significant accounting policies;
    • short-term debt;
    • long-term liabilities;
    • bonded indebtedness.
• Statistical Section: Look for the following sections in the table of contents or at the beginning of the statistical section. Note, however, that some reports may not include all of these sections, and others may provide additional debt information.
• Legal Debt Margin: establishes the entity's total debt allowed by law and shows how much has been used.
• Ratios of Outstanding Debt by Type: lists outstanding debt for the last ten fiscal years by type of bond issued, such as general obligation bonds, revenue bonds, etc. They compare each type of debt to the government's resident population and that population's personal income.
• Ratios of General Bonded Debt Outstanding: provides information on general obligation debt (that is secured by tax revenue), including tax collections, resident population and per capita debt for the last ten fiscal years. They compare general obligation debt to actual tax collections and to the government's resident population.
• Debt Capacity: shows the entity's current outstanding debt and its ability to issue more debt in the future, within their legal debt margin.
• Debt Service Funds: shows the financial resources committed to paying off the principal and interest of general long-term debt.

Debt capacity is a general term describing the amount of debt the government can repay in a timely manner from available resources without jeopardizing its financial viability. In layman's terms, it's how much debt the government can prudently afford.

The legal debt margin or debt service margin is the difference between the amount of debt or debt service the government is authorized to carry and the amount of debt or debt service the government is actually carrying. It indicates how much room the government has for additional debt before it reaches its legal limit. For example, the state of Texas has a constitutional debt limit restricting the authorization of additional state debt to be repaid with unrestricted General Revenue to an amount that ensures annual debt service payments do not exceed 5 percent of the three-year average of unrestricted General Revenue Fund revenues. The point of a legal debt margin is to restrict a government from taking on new debt past a limit that lawmakers believe is prudent.

These ratios give readers a general idea of the government's overall debt capacity. Debt ratios often are used to assess the overall level of financial risk a government and its creditors face, and also can help relate the government's debt to its taxpayers in a more personal way, such as the Debt Per Capita ratio. Another common ratio used in government financial reporting is Percentage of Debt to Tax Collections, which compares the government's debt with its tax revenue.