GASB Financial Reporting Model “Improvements”
Be a Voice on Changes to Governmental Accounting and Financial Reporting Standards
By Guadalupe “Lupita” Martinez, CPA
Senior Manager, REDW
When the Governmental Accounting Standards Board issued GASB Statement No. 34 in June 1999, it made drastic changes to how state and local governments, including tribal governments, did financial reporting. Now GASB is revisiting that statement and seeking input from stakeholders on how it can improve the model. This is an incredible opportunity to make your concerns known about the current GASB Statement 34 fund financial statements and the proposed changes to those statements.
The GASB will revisit and deliberate issues again based on the due process feedback it receives through March 2018. It plans to release its Preliminary Views and Exposure Draft Statement before issuing a final Statement. The Preliminary Views statement is expected in September 2018, with the Exposure Draft issuance in May 2020.
The fundamental issue GASB is addressing is the form and content of governmental fund financial statements, including their measurement focus and basis of accounting. The objective is to make the statements more understandable for those making decisions based on a government’s fiscal health.
Concerns with the Existing Governmental Fund Financial Statements
Government officials have told GASB of their concerns over the current methods used to generate fund financial statements. They assert that conceptual inconsistencies have diminished the effectiveness of the fund financial statements. They also take issue with how the effects of complex transactions are presented in the statements. They have argued that the current structure does not clearly state that some long-term assets and liabilities are not included, which may result in some decisions being based on incomplete information.
In response, the GASB is exploring changes that include a clearer picture of the shorter time perspective of the financial position and resource flows of the governmental funds.
One primary concern is that the governmental fund financial statements include the effects of certain assets and liabilities, but these do not reflect a shorter time perspective. For example, the payment of long-term debt and the acquisition of capital assets are both shown as expenditures in the statements. Additionally, certain assets – such as notes receivable, inventories and even prepaid assets – are not necessarily going to be collected in the short term, yet they often appear on the government fund financial assets.
Another concern about the statements is that there is little guidance on how to report complex transactions, such as derivative instruments and service concession arrangements. Such transactions are unique. It may not be appropriate to apply the current financial resources measurement focus in these statements.
Considerations in Developing Improvements to the Governmental Fund Financial Reporting Model
The GASB focused on four main goals in considering changes to the governmental fund financial statements. These are as follows:
- Significance of the Budget to the Governmental Fund Financial Statements. Governments use budgets to manage operations. Some of them have legally adopted budgets that reflect public policy priorities and specify the legal purpose for using public resources. As a result, officials compare the governmental fund financial information to the budget. Maintaining an adequate comparison to the budget is important in evaluating any changes to the fund financial statements.
- Benefits Versus Cost. GASB wants to ensure that the costs of making changes to the reporting model are justified when compared to the overall public benefit.
- Objectives of Financial Reporting. GASB is trying to create a set of financial statements that meets the objectives established in Concepts Statement No. 1, Objectives of Financial Reporting. The existing financial statement reporting model meets some, but not all, of those objectives.
- Improving Utility and Understandability. The GASB concluded that the use of funds in the governmental fund financial statements and the budget-to-actual information that depicts how the government is managed, is useful and valuable for financial statement users.
However, the need to establish a conceptual foundation that ensures the consistent use of the measurement focus and basis of accounting is necessary to make the fund financial statements easier for users to understand – and continues to be a goal of this project.
Proposed Changes to the Governmental Fund Financial Statements
The recognition of transactions in fund financial statements is driven by both the measurement focus and basis of accounting. Measurement focus refers to which resources are being recognized in the balance sheet or statement of net position; basis of accounting refers to when an event is reported. The GASB has identified three recognition approaches: Near-Term, Short-Term, and Long-Term.
The Near-Term Approach
This financial statement presents a short-term view of the governmental fund activities and excludes long-term items. Financial resources in this approach are resources that are expected to be converted into cash within 60 to 90 days. Liabilities would include those that are payable at the end of a reporting period and that normally are due within the near term. They also include the assessment of unspent resources at year-end that are available for spending in the next period.
See examples of assets and liabilities that would and would not be recognized under the Near-Term Approach.
Outflows of resources for a reporting period would be recognized as spending occurs for the period. Spending would not refer exclusively to cash payments.
Spending would include:
- payments made during the reporting period and payments normally made shortly after period-end for acquiring goods, services, capital assets, and financial resources that are not near-term during the period; and
- principal payments on matured debt and obligations that are not near-term.
Financial resources would be considered available for spending in the reporting period if:
- they are received in cash during the period or
- receivable at period-end and normally are due to convert to cash in the near term.
These financial resources are considered available for spending because payments to satisfy obligations for spending of the period normally are made either during the period or shortly after period-end.
See examples of what and would not be recognized as outflows and inflows of resources under the Near-Term Approach.
The Short-Term (Working Capital) Approach
In this approach, assets would include cash, other financial resources that are receivable at period-end and normally due to convert to cash within the subsequent operating cycle, and prepaid items and inventories that will be consumed in the next operating cycle.
Liabilities would include those that are payable at period-end and that normally are due within the next operating cycle.
See examples what would and would not be recognized as assets and liabilities under the Short-Term Approach.
Outflows of resources for a reporting period would be recognized as the underlying transaction occurs and the cash is disbursed or due within the next operating cycle. As such, outflows related to the recognition of liabilities, such as interest expense, compensated absences, and post-employment benefits would be recognized.
A separate section of the resource flows statement would present outflows related to long-term balances, such as changes in the portion of long-term liabilities due within the next operating cycle and recognized on the short-term financial resources balance sheet.
Depreciation would not be recognized as an outflow of resources because capital assets are not considered short-term and are not recognized as an asset under this approach.
Inflows of resources for a reporting period would be recognized as the underlying transaction occurs and the cash is collected or is due within the subsequent operating cycle.
Inflows related to long-term balances, such as proceeds from debt issuance, sales of capital assets, and the portion of long-term receivables due within the next operating cycle – and recognized on the short-term balance sheet – would be included in a separate section of the resource flows statement related to long-term balances.
See examples of transactions that would and would not be recognized as outflows of resources under the Short-Term Approach, as well as examples of transactions that would be recognized as inflows of resources under the Short-Term Approach.
The Long-Term Approach
This approach would recognize the effects on financial resources of transactions or events when they take place, regardless of when cash is received or paid.
This financial statement presents governmental fund activities resulting from financial resources and excludes non-financial resources, such as capital assets and long-term debt related to capital assets.
See examples of assets and liabilities that would and would not be recognized under the Long-Term Approach.
Outflows of resources for a reporting period under the long-term approach would be recognized as the underlying transaction occurs, regardless of when cash is disbursed. As such, outflows related to the accrual of liabilities, such as interest expense, compensated absences, and post-employment benefits, would be recognized.
A separate section of the resource flows statement would present outflows related to capital assets and long-term capital-related debt.
Depreciation would not be recognized as an outflow of resources because capital assets are not financial resources and, therefore, are not recognized as assets.
Inflows of resources for a reporting period under the long-term approach also would be recognized as the underlying transaction occurs, regardless of when cash is received.
A separate section of the resource flows statement would present inflows related to sales of capital assets and proceeds from the issuance of long-term capital-related debt.
See examples of what would and would not be recognized as outflows of resources under the Long-Term Approach, as well as what would and would not be recognized as inflows of resources under the Long-Term Approach.
Let Your Voice Be Heard
REDW can help you determine how these approaches would affect your organization. You may leave questions and comments in the space below, or contact Lupita Martinez directly for more information. Stay tuned for our next article on this matter. We will continue to follow this process and keep you informed.
Questions to Consider:
- Do you believe that governmental fund financial statements should continue to present information that reflects a shorter time perspective than the information presented in the government-wide financial statements and that focuses on financial, rather than economic, resources? Why?
- Do you believe that governmental fund financial statements should continue to present information that facilitates comparisons with a government’s budgetary information? Why?
- Which of the three recognition approaches provides the most relevant information for assessing fiscal accountability of the government? Why do you consider that information most relevant?
- Transactions related to tax anticipation notes or revenue anticipation notes are presented differently under the three recognition approaches:
– In the near-term approach, borrowings on and repayments of these notes would be reported as inflows of resources and outflows of resources on the statement of resource flows and in the reconciliation to the government-wide statement of net position.
– In the short-term and long-term approaches, outstanding balances of these notes would be reported as liabilities on the balance sheet, and borrowings on and repayments of these notes would be reported in the statement of cash flows.
Which approach to the reporting of these notes provides the most valuable information? Why?
- Views vary on the definition of financial resources – a concept integral to all three recognition approaches. What definition of financial resources provides the most valuable information? Why?
– Do you consider prepaid items to be financial resources? Why?
– Do you consider inventory to be financial resources? Why?
- For the recognition approach that you believe provides the most valuable information, how would you change that recognition approach to provide information that is more valuable? How would those changes make the information more valuable?
- One proposal is for a same-page reconciliation to government-wide information and the use of specific terminology to more clearly communicate that the information in governmental fund financial statements is of a shorter time perspective than information in the government-wide financial statements, and focuses on financial, rather than economic, resources.
– Are these changes effective in communicating that the information in governmental fund financial statements is different from the information in government-wide financial statements?
– How could those differences be communicated more effectively?