Notes form part of the basic financial statements and explain information necessary to understand the reported amounts. Governmental Accounting Standards Board (GASB) standards govern these disclosures for state and local governments.
The notes support both fund financial statements and government-wide financial statements, with information organized for the relevant activities and funds. General capital assets and general long-term debt appear in government-wide statements, although governmental fund balance sheets exclude those balances.
Government-wide statements distinguish governmental activities from business-type activities, and the notes preserve that distinction for capital assets and long-term liabilities. Component-unit presentation is determined before information is combined; significant component-unit disclosures remain identifiable when necessary.
Management’s discussion and analysis (MD&A) provides management’s explanation of financial results, including significant developments involving capital assets and debt. It belongs to required supplementary information (RSI), which accompanies the basic financial statements without becoming part of them.
Illustrations assume a fiscal year beginning after June 15, 2026, with the applicable requirements below implemented. For local governments, a standard’s issuance, mandatory application and permitted early adoption are separate events.
Common mistakes
- Current portion added twice. Adding the included $140,000 current portion to $440,000 total liabilities produces an unsupported $580,000 total: .
- Every movement must be gross. The labeled $20,000 net change is permitted for compensated absences; that exception does not justify netting the bank loan’s movements.
- Maturities omit interest. The loan requires disclosure of $24,000 future interest alongside its $300,000 principal repayment requirements.
Bottom line
- Notes form part of the basic financial statements; MD&A and other RSI remain outside them.
- Significant accounting policies explain the reporting entity, fund presentation, measurement focus, accounting basis, availability, capitalization and resource-spending conventions.
- Capital assets notes separate major classes, activity types, gross balances and accumulated depreciation or amortization, including changes during the period.
- Infrastructure policies and carrying amounts belong in basic notes; modified-approach condition and preservation schedules belong in RSI.
Exam shortcut
Identify the applicable reporting period first, then distinguish governmental funds from government-wide, proprietary and fiduciary reporting. Scan a disclosure packet for missing beginning balances, movements, accumulated depreciation, current portions and future interest before considering calculations. Treat “bank loan” and “direct placement” as signals to inspect separate debt disclosures and contractual acceleration provisions. Route infrastructure condition and preservation schedules to RSI; route policies, asset balances and debt terms to basic notes.
The full lesson (about 4,541 words, 30 min read) adds 3 worked examples, all 4 common mistakes, a self-check, free in the app.
Learning objectives
- III.A5
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