What Are Annual Comprehensive Financial Reports (ACFR)?
An Annual Comprehensive Financial Report (ACFR) is a set of financial statements that a government entity issues in keeping with the requirements of the Governmental Accounting Standards Board (GASB). An ACFR describes an entity’s annual spending as well as its assets and liabilities at the end of a reporting year. The ACFR, issued by states, municipalities, and other government entities, provides a summarization of the annual reports of all of an entity’s agencies. Being a detailed presentation of a state’s financial condition, the ACFR comprises introductory, financial, and statistical sections.
The Current ACFR Format And The Inefficiencies Involved
An estimated 30,000 state and local governments in the US produce audited financial reports annually. However, these reports are made available in PDF format and so the information they contain is locked up. While data in the PDF format can very well be accessed and read by end-users, more vital operations such as data aggregation for the analysis and comparison of financial performance across government entities are not facilitated.
The Need For ACFRs In A Standardized, Machine-readable Format
There is a need to provide ACFRs in a standardized, machine-readable format that will ensure the data is more widely and easily accessible and can be sliced and diced in a number of ways that facilitate better decision-making. The open data standard best suited for this purpose and which comes with a track record of revolutionizing corporate compliance reporting across geographies is the eXtensible Business Reporting Language (XBRL) format.
In 2009, the US Securities and Exchange Commission (SEC) mandated XBRL reporting requirements for quarterly and annual financial information by public companies and in 2018 the Commission adopted the more advanced Inline XBRL (iXBRL) for corporate reporting. The use of the XBRL format has enhanced financial reporting by public companies through greater transparency, accessibility, and comparability, leading to benefits such as lower cost of capital and higher investor interest for companies, apart from investor protection.
The benefits that would accrue to entities issuing ACFRs from reporting in XBRL, to mention a few, are greater information transparency, lower costs of filing after an initial investment in digital filing software or services, and, most importantly, greater ease for buyers of municipal bonds to assess the creditworthiness of ACFR filing entities.
Per US Federal Reserve data as of September 30, 2021, the US municipal bond market is worth $4.0 trillion, which is much smaller than the $15.0 trillion that corporate and foreign bonds are worth. However, municipal bond issuers are far higher in number than corporate and foreign bond issuers.
If the financial information of municipal bond issuers can be captured in the XBRL structured data format, the markets would find it easier to gauge the price government entities would pay to borrow funds for infrastructure building and maintenance. This is bound to increase fund flows into the municipal bond market.
Which the US States Have Taken Steps Towards XBRL-based Reporting?
In 2018, Florida passed a bill that requires more than 400 separate municipalities, including 282 cities, to submit their financial information in the XBRL format by September 2022.
California passed a similar bill in 2019, calling for an Open Financial Statements Act that would establish a 9-member Open Financial Statement Commission tasked with building test taxonomies to represent public agency financial filings.
Demonstration Comprehensive Annual Financial Report (CAFR) Taxonomy
In January 2019, XBRL US released the Demonstration Comprehensive Annual Financial Report (CAFR) Taxonomy that it developed along with the Local Government Disclosure Modernization Working Group. The taxonomy has since gone through two releases, one in the latter half of 2019 and the other in early 2020. The acronym CAFR has now been changed to ACFR as the former reads like a racial slur.
The demonstration taxonomy has already been put to use. XBRL US has said that Will County, Illinois, is the first local government in the US to publish its financial statement data in the XBRL format and publish it on its website.
Other Moves Towards Data Transparency: OPEN Government Data Act & GREAT Act
In January 2019, then US President Donald Trump signed into law the Foundations for Evidence-Based Policymaking Act, which includes the Open, Public, Electronic, and Necessary (OPEN) Government Data Act. The OPEN Government Data Act mandates that all non-sensitive government data be made public in machine-readable formats by default. The legislation is aimed at improving the efficiency of government services, enhancing public access to government information, and facilitating innovation and entrepreneurship.
In January 2020, the US Congress passed the Grant Reporting Efficiency and Agreements Transparency (GREAT) Act, which is aimed at transforming federal grant reporting and modernizing the process with data standards. This would help bring more accountability and transparency to federal funding and its reporting. Improving the oversight of state spending and making financial reports at the local level more accessible to constituents would be the purpose served.