February 1999 Issue

Substantial progress has been made, and the end is in sight.

Status of the New Governmental Financial Reporting Model

By Craig Foltin

In Brief

Deliberations, Tentative
Conclusions, and Outstanding Issues

In January 1997, GASB issued an exposure draft of a proposed statement, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. The exposure draft proposed a dual reporting perspective with two sets of financial statements. This and other proposals met with a great deal of controversy.

The board has reached a number of tentative conclusions, including the elimination of the dual-perspective approach. Major fund statements will be presented that are reconciled to entity-wide statements on a full accrual basis. Most of the unresolved issues involve fund reporting and charges for the use of expended assets. The complexity of all these issues has caused GASB to miss its initial target date for publication of a final statement. A June 1999 date is the new target.

In January 1997, the Governmental Accounting Standards Board (GASB) issued an exposure draft (ED) of a proposed statement entitled Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. The issue has been on GASB's agenda since its inception in 1984 and is the most important project in the history of the board. The proposed changes are so expansive that every GASB statement to date will be affected.

The ED includes a dual-reporting perspective with two sets of financial statements; one at the entity-wide level that follows the flow of economic resources method using full accrual basis, and another at the fund level that follows the flow of financial resources method using modified accrual and cash basis accounting. Other major proposed changes in the ED include the reporting and depreciation of all capital assets, including infrastructure, at the entity-wide level and the requirement of supplementary information in a section called Management's Discussion and Analysis (MD&A).

The highly anticipated proposal was received with a great deal of controversy. GASB received a record number of comment letters--more than twice that of any other ED issued by the board. Concerns, criticisms, and suggested revisions have poured in from every corner of the profession. The challenge for GASB has been considering the very diverse responses; there appear to be as many opinions as individuals who responded. Major criticisms encompass complexity, cost versus benefit, and audit implications of the ED. In the following statement, the AICPA echoes the concerns of many who responded to the ED:

Although we find certain aspects of the proposal appealing and believe they would improve governmental financial reporting, our concerns about the complexity of the model, including the use of two very different measurement focuses and bases of accounting, and the potential additional costs associated with the model override the proposal's positive attributes.


Two years have now passed, and GASB is in the final stages of developing a statement. Since January 1997, GASB has received 398 comment letters, held six public hearings, and listened to the testimony of 74 individuals. The board began deliberations in September 1997 and reached little resolution through the winter. A 30-member task force was reassembled in April 1998 for further insight and discussion on the matter. The breakthrough event was the decision to abandon the dual-perspective approach. GASB decided that there can only be one entity-wide presentation and it must be on the full accrual basis. There are issues still to be resolved and tentative conclusions that may change. But the board is currently committed to issuing a final statement in June 1999. Table 1 lists major changes and tentative decisions regarding the governmental financial reporting model.

The Basic Issues

The dual-perspective approach is out. The dual perspective was originally proposed to avoid alienating some of the board's major constituents, those that were strongly tied to the fund concepts. However, the fund perspective advocates failed to hold the day. Many comment letters, particularly those from accounting firms and professional organizations, pushed for entity-wide statements only. Ernst and Young stated the following:

The basic financial statements required by the dual perspective would be complex and confusing to all but the most technically sophisticated user. We continue to believe that the financial information provided in the financial statements at the entity-wide perspective is the most meaningful to users. Further, the entity-wide perspective financial statements are presented in a format that is more easily understood by users. It enables users to evaluate better a government's financial position and results of operations and to measure interperiod equity.

In response to this, it appears likely that nonmajor funds and other fund-based details will be in the notes or required supplementary information. However, major funds will be on the face of the basic financial statements.

Measurement focus and basis of accounting will remain the economic resource focus at the entity-wide perspective. This method emphasizes operational accountability and consumption-basis costing. For fund reporting, the original ED proposed flow of current financial resources focus and modified accrual accounting. This method emphasized fiscal accountability and acquisition and outflow costing.

For fund information, the board is leaning toward allowing governments to use either this method or an alternative called the total financial resources method that includes more accruals in governmental funds. This alternative procedure requires that all operating transactions be reported on the accrual basis while allowing that transactions related to capital assets and debt be reported on cash basis. The total financial resources option is under consideration because most governments do not accrue capital items, but many already accrue items that will be paid within the current year. Also, after much discussion, the board has decided against a parameters approach that would have allowed governments to use any method of financial resource flows that fell within parameters established by the board.

Capital asset reporting remains an important unresolved issue. Opponents argue that the costs outweigh the benefits. The National Association of State Auditors, Comptrollers, and Treasurers states:

We are convinced that the reporting of historical cost information with an annual use charge (i.e., depreciation) adds no meaningful or useful information to the financial statements.

Nevertheless, GASB seems committed to requiring the reporting of all capital assets, including infrastructure, at the entity-wide level. However, instead of requiring only the use of historical cost depreciation, the board is considering other variations of an alternative called the maintenance/preservation approach. Instead of restating capital assets retroactively and prospectively at historical cost as proposed in the original ED, the maintenance/preservation approach values assets at current cost to buy or construct. This method accommodates the majority of government assets that have indeterminable useful lives. Each year, asset values would be adjusted for inflation. The amount spent to maintain and preserve the asset would be reported in lieu of depreciation expense. Entities would also be required to make assessments of asset condition. If the market value falls below recorded value, an additional expense would be recorded. GASB appears to be receptive to this method; however, multiple versions exist and the maintenance/preservation approach must be further refined before it is adopted. Table 2 compares the alternative approaches for accounting purposes. The maintenance/preservation methods will not silence critics opposing capital asset reporting, but they may calm them down a bit.

Management's discussion and analysis (MD&A) will advance as planned in the ED. MD&A will maintain the condition of required supplementary information that requires the application of certain limited procedures by auditors under SAS No. 52, Omnibus Statement on Auditing Standards--Required Supplementary Information. The board is working toward having the guidelines on transmittal letters modified to eliminate overlap of information. GASB also clarified terms and agreed to omit condensed comparative statements in MD&A if comparatively reported in the financial statements.


Other issues have also been decided or remain to be resolved by GASB. Table 3 provides a summary of these and previously discussed matters. Entity-wide cash flow statements will not be required by GASB. The board feels governmental funds serve a similar purpose. Cash flow statements will still be required for enterprise activities within the presentation of fund information.

It now appears that reconciliation of fund information to entity-wide statements will be required as part of the financial statements, and more detailed reconciliations may be provided in the notes. The light went "on" for GASB when it realized and accepted the need for a recommendation from the fund level to the entity-wide statements.

Segment reporting may now be required for business-type activities. The proposal changes the current individual enterprise funds focus to an identifiable activity focus. A segment would be defined as "having a specific identifiable revenue stream pledged to support revenue-backed debt" with "related expenses, assets, and liabilities that can be identified." The board is also considering allowing the reporting of these activities using FASB pronouncements that do not conflict with GASB standards.

It now appears that fiduciary activity reporting will take on a different role. GASB has decided not to include this information in the entity-wide statements. This data will be redefined and regrouped somewhere within the reporting of fund information, but not brought forward to the entity-wide statements.

The Forces at Work

Most of the tension directed at the board in trying to move the project forward can be attributed to the difference between accounting theory and practice. While there are dissenting views on both sides, accounting firms and the AICPA appeared to favor theory, while finance officers and their representative professional organizations seemed prefer operational practice. This can be seen in their written responses to the ED. Based upon comment letters, most accounting firms favored entity-wide perspective statements only. Similarly, they favored the economic resource measurement focus, full accrual accounting, recording and depreciation of infrastructure, and the requirement of supplementary information in the form of MD&A. These methods are more consistent with accounting theory and private-sector practice.

Most finance officers, however, prefer fund-based statements with flow of financial resource focus and modified accrual accounting. They are absolutely against any recording and depreciation of infrastructure and oppose MD&A as required supplementary information. These methods are more consistent with current practice and require much less effort.

Private-sector accounting has flourished using a strong theoretical foundation, while government accounting lags behind. However, the existing finance officer leopards do not wish to change their spots. Reconciling theory with practice was GASB's most difficult task to date.

Where Do We Go from Here?

The board is committed to a June 1999 issuance date, one year later than its first target. The dissension surrounding the method of reporting capital assets remains so strong, however, that it may not be resolved by the June 1999 target issue date of the statement. However, GASB still plans to publish the standard with or without resolution of this issue. Language in the standard will likely state that guidance on reporting of capital assets is forthcoming. GASB feels that an additional 12 to 18 months will be necessary to gather information in order to resolve this important matter.

The planned effective dates of June 15, 2000, with an extended period for infrastructure of June 15, 2003, will have to be pushed back. The board has decided, based upon an opinion from a CPA firm that due process has been followed, not to reexpose the proposals. Starting from square one again would also jeopardize the project and maybe the existence of GASB itself. GASB realizes it must pick up the pace if it is going to meet the June date. Still not known is whether some constituents may try to resist the entity-wide conclusion and the deemphasizing of fund presentations. The new financial reporting model will eventually become a reality, so practitioners and finance officers should begin their study now.

Copies of the ED, meeting schedules, minutes, and issue papers may be obtained from the GASB order department by calling (203) 847-0700 or by viewing GASB's website at www.gasb.org. *

Craig Foltin, PhD, CPA, is auditor for the City of Lorain, Ohio, and a part-time lecturer at Cleveland State University.

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