GASB Begins Its Re-examination of the Financial Reporting Model
It has been more than 17 years since the Governmental Accounting Standards Board, or GASB, issued its landmark Statement No. 34: Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. It’s hard to believe, but true. With the release of an invitation to comment in December 2016, GASB is again turning its attention to the government reporting model, beginning with a focus on the governmental funds. This highly anticipated reporting model project addresses several potential improvements to governmental fund reporting, and the GASB believes this project will have a significant impact on the foundation of state and local governments’ accounting and financial reporting.
About the Author
Kinney Poynter is the executive director for the National Association of State Auditors, Comptrollers, and Treasurers (NASACT). In this capacity, he is responsible for the overall operations of NASACT as well as the programs of the National Association of State Comptrollers and National State Auditors Association. NASACT is a professional organization whose mission is to assist state leaders to enhance and promote effective and efficient management of governmental resources. Kinney has been with NASACT since 1989, previously serving as the association’s Deputy Director and various other positions. In addition to his experience with NASACT, he has been a partner of a local public accounting firm in Lexington, Ky., and a principal auditor with the Kentucky Auditor of Public Accounts, where he conducted financial, performance, and investigative audits on state agencies and local governments. While in public practice, he performed single audits on various nonprofit organizations. Kinney has BS and MS degrees in accounting from the University of Kentucky. He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants, where he served on the AICPA Council from 2009 - 2012. He is also a member of the Kentucky Society of Certified Public Accountants, where he has served as chairman of the Governmental Accounting Committee. Kinney has served as an instructor domestically and internationally on a variety of governmental accounting and auditing issues.
Statement 34, issued by the Governmental Accounting Standards Board, or GASB, in June 1999, was the culmination of 15 years of research, deliberation and due process. In Statement 34, the GASB established the present blueprint for state and local government financial reporting, which includes the format and measurement focus of the basic financial statements, certain related notes to the financial statements, and required supplementary information such as management’s discussion and analysis, or MD&A.
Among its many features, Statement 34 introduced government-wide financial statements containing accrual information—which notably included the reporting of infrastructure, other capital assets, and long-term liabilities—for activities previously reported only on a modified accrual basis in the governmental funds. Statement 34 also required a narrative MD&A to precede the financial statements, added the presentation of the original budget to the budgetary comparison schedule, introduced major fund reporting in the governmental and enterprise funds, and added note disclosures related to capital asset and long-term liability activity during the reporting period.
The reporting model has a pervasive influence over the effectiveness of financial reporting by state and local governments and the ability of that reporting to achieve the desired objectives. As a result, the GASB decided that it was important, as part of its commitment to maintaining the effectiveness of its standards, to re-examine the current financial reporting model now that it has been in place for a sufficient length of time. GASB’s pre-agenda research showed that most of the components of the financial reporting model are effective; however, several areas where improvements may be made were identified.1
To begin exploring improvements, on Dec. 7, 2016, the GASB issued an invitation to comment, or ITC, in a document titled Financial Reporting Model Improvements—Governmental Funds. The ITC addresses potential improvements to the existing governmental fund financial reporting model. The objective of these improvements is to enhance the effectiveness of the model in providing information that is essential for decision-making and enhance the ability to assess a government’s accounting and address certain application issues, based upon the results of the pre-agenda research on the financial reporting model.
A Summary of the Major Changes
The two fundamental issues of GASB’s financial reporting model re-examination project included in the ITC are the governmental funds’ measurement focus and basis of accounting and financial statement presentation.
Measurement Focus and Basis of Accounting
In the ITC, GASB explores a conceptually consistent measurement focus and basis of accounting. Today’s reporting model presents information using the current financial resources measurement focus and modified accrual basis of accounting. GASB acknowledges that the current financial measurement focus and modified accrual basis of accounting, which guides recognition of elements such as assets and liabilities in government fund financial statements, lacks a conceptual framework. Rather, this collection of accounting conventions is intended to present primarily a shorter time perspective of the activities reported. Some GASB stakeholders question whether items that do not have a shorter time perspective, such as receivables that are long-term, or items that may not be financial in nature, such as inventories and prepaid items, should continue to be reported as assets in governmental funds.2
Importantly, the ITC introduces three alternative recognition approaches for governmental fund financial statements:
1. Near-term financial resources.
2. Short-term financial resources.
3. Long-term financial resources.
These three approaches fall on a continuum—from a closer-to-cash approach (near-term) at one end of the spectrum to a closer-to-economic resources approach (long-term) on the other. The short-term financial resources approach is a middle ground approach. These alternatives were developed to make governmental funds information more useful for financial statement users for making decisions and assessing government accountability.
The near-term approach has a shorter time perspective, generally 30 to 60 days, and is the most
like cash reporting. It may present information that more closely aligns with budgetary information. Under this approach, near-term receivables are recognized as assets, and prepaid items and inventory are not reported in the governmental fund financial statements. Reportable liabilities include those that are payable at period-end and are normally due within the near term.
The short-term approach provides information focused on a government’s one-year fiscal period. The financial statements present financial resource inflows and outflows for the period as well as period-end balances related to short-term (defined as one year) financial assets and liabilities. Any short- or long-term receivables due in the subsequent fiscal year, as well as prepaid and inventory items, are reported as assets. Reportable liabilities include:
- Items payable within the subsequent fiscal year.
- Current portions of compensated absences.
- Current portions of long-term capital and operating debt.
- Net pension and other post-employment benefit liabilities.
Because the short-term approach is further from the current financial resources measurement focus, a governmental fund statement of cash flows needs to be included in the basic financial statements.
The long-term approach recognizes the effects of transactions or events on financial resources when they take place, regardless of when cash is received or paid. This approach reports all assets and liabilities other than capital assets and capital-related debt.
Capital-related debt is included in the calculation of net investment in the capital assets component of net position. The balances of long-term operating debt, compensated absences, and pension and other post-employment benefit liabilities would be reported in the governmental fund financial statement.
This approach requires the balance sheet to be presented in a classified format that presents current (defined as one year) assets and liabilities separately from noncurrent items. This approach also requires a governmental fund statement of cash flows be included in the basic financial statements.
Financial Statement Presentation
For all approaches, the ITC considers a presentation format alternative for the statement of resource flows that would be conceptually consistent with its measurement focus and basis of accounting. A current and long-term activity format would report inflows and outflows of resources related to capital assets and long-term debt separately from the inflows and outflows of resources of other governmental fund activities. The current accounting of more complex transactions such as those involving derivative instruments, service concession arrangements and other transactions, may not be appropriate under the current financial resources measurement focus conventions and requires a conceptual foundation that addresses governmental fund statements. The resources flow presentation would differ under each approach. Today’s existing format generally presents inflows and outflows of resources considered revenues and expenditures separately from flows reported as other financing sources and uses.
For both the short-term and long-term financial resources recognition approaches, the ITC introduces a statement of cash flows as a potential enhancement to the basic financial statements. The ITC seeks feedback on whether this should be required, what difficulties may arise in presenting a statement of cash flows for governmental funds and which of the four existing statement of cash flow classifications are the most appropriate.
The ITC explores improved reconciliations from the information in governmental fund financial statements to information in the government-wide financial statements. The condensed reconciliations would be presented on the same page as the balance sheet or resource flows statement. Specific terminology is used to more clearly communicate that the information in governmental fund financial statements is different than the information in government-wide financial statements. Clearer titles, descriptions and labels designate the governmental fund financial statements’ shorter time perspective and focus on financial, rather than economic resources.
Because governmental fund financial statements’ information is limited to a shorter time perspective than the information conveyed in government-wide financial statements and has a focus on financial resources, they convey information about fiscal accountability, not operational accountability.
There’s More to Come
The following additional topics will be considered for inclusion in a Preliminary Views document in
the next phase of the project:3
- Government-Wide Statement of Activities—GASB will consider alternatives for the format of the statement of activities.
- Proprietary Fund Financial Statements—GASB will consider reporting alternatives related to the existing requirement to separately present operating and non-operating revenues and expenses.
- Budgetary Comparisons—GASB will consider the appropriate method of communication (as a basic financial statement or required supplementary information) for budgetary comparison information and which budget variances, if any, should be required to be presented.
- Permanent Funds—GASB will consider alternatives for reporting information about permanent funds.
The following additional topics will be considered for inclusion in an Exposure Draft in a future phase of the project:4
- Management’s Discussion and Analysis—GASB will consider alternatives for enhancing the financial statement analysis component of MD&A, eliminating components of MD&A that are boilerplate and no longer necessary for understanding the financial reporting model, and clarifying guidance for presenting the section of MD&A on currently known facts, decisions, or conditions that are expected to have a significant effect on financial position or results of operations.
- Debt Service Fund Presentation—GASB will consider alternatives for providing additional information about debt service funds, either individually or in aggregate, in the basic financial statements.
- Extraordinary and Special Items—GASB will consider alternatives to improve the consistency of application of the guidance for reporting extraordinary and special items.
- Other Issues—As appropriate and in conjunction with other topics, GASB will consider alternatives that could permit more timely financial reporting or that could reduce complexity overall.
It’s Important to Provide Your Feedback
The ultimate results of this project will have long-lasting implications for government financial reporting. The National Association of State Auditors, Comptrollers and Treasurers, or NASACT, will provide feedback to the GASB in the form of written comments and oral testimony. NASACT encourages all governments and other entities that follow GASB pronouncements to provide feedback on this important project. Input from all stakeholders is vital throughout the process, but particularly in the early stages of the exposure process.
1 Governmental Accounting Standards Board (GASB), Invitation to Comment (ITC) Financial Reporting Model Improvements – Governmental Funds (December 2016), p. 26.
2 GASB ITC, Financial Reporting Model Improvements – Governmental Funds (December 2016), p. vii.
3 GASB ITC, Financial Reporting Model Improvements – Governmental Funds (December 2016), p. 1-2.
4 GASB ITC, Financial Reporting Model Improvements – Governmental Funds (December 2016), p. 2.